Download Phillips 66 - cloudfront.net

As filed with the Securities and Exchange Commission on April 5, 2012
File No. 001-35349
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
Phillips 66
(Exact name of registrant as specified in its charter)
Delaware
45-3779385
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer
Identification No.)
600 N. Dairy Ashford, Houston, Texas
77079
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: 281-293-6600
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class
to be so registered
Name of each exchange on which
each class is to be registered
Common Stock, par value $0.01 per share
New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x] Smaller reporting company [ ]
P HILLIPS 66
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
We have filed our Information Statement as Exhibit 99.1 to this Form 10. For your convenience, we have provided below a cross-reference
sheet identifying where the items required by Form 10 can be found in our Information Statement. None of the information contained in the
Information Statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically
incorporated by reference.
Item
No.
1.
Item Caption
Business.
Location in Information Statement
The following sections of our Information Statement are hereby
incorporated by reference: “Summary,” “Risk Factors,” “Cautionary
Statement Regarding Forward-Looking Statements,” “The Separation,”
“Capitalization,” “Business and Properties,” “Certain Relationships and
Related Transactions,” “Where You Can Find More Information” and
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
1A.
Risk Factors.
The following sections of our Information Statement are hereby
incorporated by reference: “Summary,” “Risk Factors” and “Cautionary
Statement Regarding Forward-Looking Statements.”
2.
Financial Information.
The following sections of our Information Statement are hereby
incorporated by reference: “Summary,” “Selected Combined Financial
Data of Phillips 66,” “Risk Factors,” “Capitalization,” “Unaudited Pro
Forma Condensed Combined Financial Statements,” “Index to Financial
Statements” and the statements referenced therein, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and “Quantitative and Qualitative Disclosures About
Market Risk.”
3.
Properties.
The following section of our Information Statement is hereby
incorporated by reference: “Business and Properties.”
4.
Security Ownership of Certain Beneficial Owners and
Management.
The following section of our Information Statement is hereby
incorporated by reference: “Stock Ownership.”
5.
Directors and Executive Officers.
The following sections of our Information Statement is hereby
incorporated by reference: “Management” and “Directors.”
i
Item
No.
Item Caption
Location in Information Statement
6.
Executive Compensation.
The following sections of our Information Statement are hereby
incorporated by reference: “Management,” “Compensation Discussion
and Analysis” “Executive Compensation,” “Non-Employee Director
Compensation” and “Certain Relationships and Related Transactions.”
7.
Certain Relationships and Related Transactions, and
Director Independence.
The following sections of our Information Statement are hereby
incorporated by reference: “Management,” “Directors,” “Certain
Relationships and Related Transactions” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
8.
Legal Proceedings.
The following section of our Information Statement is hereby
incorporated by reference: “Business and Properties—Legal
Proceedings.”
9.
Market Price of and Dividends on the Registrant’s
Common Equity and Related Stockholder Matters.
The following sections of our Information Statement are hereby
incorporated by reference: “Summary,” “The Separation,” “Dividend
Policy,” “Capitalization” and “Description of Capital Stock.”
10.
Recent Sales of Unregistered Securities.
Not Applicable.
11.
Description of Registrant’s Securities to be Registered.
The following sections of our Information Statement are hereby
incorporated by reference: “Dividend Policy” and “Description of
Capital Stock.”
12.
Indemnification of Directors and Officers.
The following section of our Information Statement is hereby
incorporated by reference: “Description of Capital Stock—Limitation
on Liability of Directors and Indemnification of Directors and Officers.”
13.
Financial Statements and Supplementary Data.
The following section of our Information Statement is hereby
incorporated by reference: “Index to Financial Statements” and the
statements referenced therein.
14.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not Applicable.
15.
Financial Statements and Exhibits.
The following sections of our Information Statement are hereby
incorporated by reference: “Unaudited Pro Forma Condensed Combined
Financial Statements” and “Index to Financial Statements” and the
statements referenced therein.
ii
(a)
List of Financial Statements and Schedules : The following financial statements are included in the Information Statement and filed as
part of this Registration Statement on Form 10:
Unaudited Pro Forma Condensed Combined Financial Statements
Report of Independent Registered Public Accounting Firm
Combined Statement of Income for the years ended December 31, 2011, 2010 and 2009
Combined Statement of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009
Combined Balance Sheet as of December 31, 2011 and 2010
Combined Statement of Cash Flows for the years ended December 31, 2011, 2010 and 2009
Combined Statement of Changes in Net Investment for the years ended December 31, 2011, 2010 and 2009
Notes to Combined Financial Statements
Schedule II—Valuation and Qualifying Accounts (Combined)
(b)
Exhibits . The following documents are filed as exhibits hereto:
Exhibit Number
Exhibit Description
2.1*
Form of Separation and Distribution Agreement between ConocoPhillips and Phillips 66.
3.1
Form of Phillips 66 Amended and Restated Certificate of Incorporation.
3.2
Form of Phillips 66 Amended and Restated By-laws.
4.1*
Credit Agreement among Phillips 66, Phillips 66 Company, JPMorgan Chase Bank, N.A., as Administrative Agent,
and the lenders named therein, dated as of February 22, 2012.
4.2*
Term Loan Agreement among Phillips 66, Phillips 66 Company, JPMorgan Chase Bank, N.A., as Administrative
Agent, and the lenders named therein, dated as of February 22, 2012.
4.3
Indenture, dated as of March 12, 2012, among Phillips 66, as issuer, Phillips 66 Company, as guarantor, and The Bank
of New York Mellon Trust Company, N.A., as trustee, in respect of senior debt securities of Phillips 66.
4.4
Form of the terms of the 1.950% Senior Notes due 2015, the 2.950% Senior Notes due 2017, the 4.300% Senior Notes
due 2022 and the 5.875% Senior Notes due 2042, including the form of the 1.950% Senior Notes due 2015, the
2.950% Senior Notes due 2017, the 4.300% Senior Notes due 2022 and the 5.875% Senior Notes due 2042.
4.5
Registration Rights Agreement, dated as of March 12, 2012, among Phillips 66, Phillips 66 Company and Citigroup
Global Markets Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC and RBS Securities Inc., as
representatives of the Initial Purchasers.
iii
Exhibit Number
Exhibit Description
10.1*
Form of Tax Sharing Agreement among ConocoPhillips, ConocoPhillips Company, Phillips 66 and Phillips 66
Company.
10.2*
Form of Transition Services Agreement between ConocoPhillips and Phillips 66.
10.3*
Form of Employee Matters Agreement between ConocoPhillips and Phillips 66.
10.4*
Form of Indemnification and Release Agreement between ConocoPhillips and Phillips 66.
10.5*
Form of Intellectual Property Assignment and License Agreement between ConocoPhillips and Phillips 66.
10.6*
Second Amended and Restated Limited Liability Company Agreement of Chevron Phillips Chemical Company LLC,
dated July 1, 2002, by and between ChevronTexaco Corporation, Phillips Petroleum Company, Chevron U.S.A. Inc.,
Phillips Chemical Holdings Company, WesTTex 66 Pipeline Company and Phillips Petroleum International
Corporation.
10.7*
Consent and First Amendment to the Second Amended and Restated Limited Liability Company Agreement of
Chevron Phillips Chemical Company LLC, dated September 30, 2007, by and between Chevron U.S.A. Inc.,
ConocoPhillips Company, Phillips Chemical Holdings Company, WesTTex 66 Pipeline Company and Phillips
Petroleum International Corporation.
10.8*
Second Amendment to the Second Amended and Restated Limited Liability Company Agreement of Chevron Phillips
Chemical Company LLC, dated November 11, 2011, by and between Chevron U.S.A. Inc., ConocoPhillips Company,
Phillips Chemical Holdings Company, WesTTex 66 Pipeline Company and Phillips Petroleum International
Corporation.
10.9*
Consent Agreement, dated as of November 11, 2011, by and between Chevron Phillips Chemical Company LLC,
ConocoPhillips, ConocoPhillips Company, Phillips Chemical Holdings Company, WesTTex 66 Pipeline Co., Phillips
Petroleum International Corporation, Chevron Corporation, and Chevron U.S.A. Inc.
10.10*
First Amendment to Consent Agreement, dated as of February 10, 2012, by and between Chevron Phillips Chemical
Company LLC, ConocoPhillips, ConocoPhillips Company, Phillips Chemical Holdings Company, WesTTex 66
Pipeline Co., Phillips Petroleum International Corporation, Chevron Corporation, and Chevron U.S.A. Inc.
10.11*
Third Amendment to the Second Amended and Restated Limited Liability Company Agreement of Chevron Phillips
Chemical Company LLC, dated February 10, 2012, by and between Chevron U.S.A. Inc., ConocoPhillips Company,
Phillips Chemical Holdings Company, WesTTex 66 Pipeline Company and Phillips Petroleum International
Corporation.
10.12*
Second Amended and Restated Limited Liability Company Agreement of Duke Energy Field Services, LLC, dated
July 5, 2005, by and between ConocoPhillips Gas Company and Duke Energy Enterprises Corporation.
iv
Exhibit Number
*
Exhibit Description
10.13*
First Amendment to Second Amended and Restated Limited Liability Company Agreement of Duke Energy Field
Services, LLC, dated August 11, 2006, by and between ConocoPhillips Gas Company and Duke Energy Enterprises
Corporation.
10.14*
Second Amendment to Second Amended and Restated Limited Liability Company Agreement of DCP Midstream,
LLC (formerly Duke Energy Field Services, LLC), dated February 1, 2007, by and between ConocoPhillips Gas
Company, Spectra Energy DEFS Holding, LLC, and Spectra Energy DEFS Holding Corp.
10.15*
Third Amendment to Second Amended and Restated Limited Liability Company Agreement of DCP Midstream, LLC
(formerly Duke Energy Field Services, LLC), dated April 30, 2009, by and between ConocoPhillips Gas Company,
Spectra Energy DEFS Holding, LLC, and Spectra Energy DEFS Holding Corp.
10.16*
Fourth Amendment to Second Amended and Restated Limited Liability Company Agreement of DCP Midstream,
LLC (formerly Duke Energy Field Services, LLC), dated November 9, 2010, by and between ConocoPhillips Gas
Company, Spectra Energy DEFS Holding, LLC, and Spectra Energy DEFS Holding Corp.
99.1
Preliminary Information Statement of Phillips 66, subject to completion, dated April 5, 2012.
Previously filed .
v
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
Phillips 66
Date: April 5, 2012
By:
vi
/s/ Greg C. Garland
Greg C. Garland
President
EXHIBIT INDEX
Exhibit
Number
2.1*
3.1
3.2
4.1*
4.2*
4.3
4.4
4.5
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
99.1
Exhibit Description
Form of Separation and Distribution Agreement between ConocoPhillips and Phillips 66.
Form of Phillips 66 Amended and Restated Certificate of Incorporation.
Form of Phillips 66 Amended and Restated By-laws.
Credit Agreement among Phillips 66, Phillips 66 Company, JPMorgan Chase Bank, N.A., as Administrative Agent, and the
lenders named therein, dated as of February 22, 2012.
Term Loan Agreement among Phillips 66, Phillips 66 Company, JPMorgan Chase Bank, N.A., as Administrative Agent,
and the lenders named therein, dated as of February 22, 2012.
Indenture, dated as of March 12, 2012, among Phillips 66, as issuer, Phillips 66 Company, as guarantor, and The Bank of
New York Mellon Trust Company, N.A., as trustee, in respect of senior debt securities of Phillips 66.
Form of the terms of the 1.950% Senior Notes due 2015, the 2.950% Senior Notes due 2017, the 4.300% Senior Notes due
2022 and the 5.875% Senior Notes due 2042, including the form of the 1.950% Senior Notes due 2015, the 2.950%
Senior Notes due 2017, the 4.300% Senior Notes due 2022 and the 5.875% Senior Notes due 2042.
Registration Rights Agreement, dated as of March 12, 2012, among Phillips 66, Phillips 66 Company and Citigroup Global
Markets Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC and RBS Securities Inc., as representatives
of the Initial Purchasers.
Form of Tax Sharing Agreement among ConocoPhillips, ConocoPhillips Company, Phillips 66 and Phillips 66 Company.
Form of Transition Services Agreement between ConocoPhillips and Phillips 66.
Form of Employee Matters Agreement between ConocoPhillips and Phillips 66.
Form of Indemnification and Release Agreement between ConocoPhillips and Phillips 66.
Form of Intellectual Property Assignment and License Agreement between ConocoPhillips and Phillips 66.
Second Amended and Restated Limited Liability Company Agreement of Chevron Phillips Chemical Company LLC,
dated July 1, 2002, by and between ChevronTexaco Corporation, Phillips Petroleum Company, Chevron U.S.A. Inc.,
Phillips Chemical Holdings Company, WesTTex 66 Pipeline Company and Phillips Petroleum International Corporation.
Consent and First Amendment to the Second Amended and Restated Limited Liability Company Agreement of Chevron
Phillips Chemical Company LLC, dated September 30, 2007, by and between Chevron U.S.A. Inc., ConocoPhillips
Company, Phillips Chemical Holdings Company, WesTTex 66 Pipeline Company and Phillips Petroleum International
Corporation.
Second Amendment to the Second Amended and Restated Limited Liability Company Agreement of Chevron Phillips
Chemical Company LLC, dated November 11, 2011, by and between Chevron U.S.A. Inc., ConocoPhillips Company,
Phillips Chemical Holdings Company, WesTTex 66 Pipeline Company and Phillips Petroleum International Corporation.
Consent Agreement, dated as of November 11, 2011, by and between Chevron Phillips Chemical Company LLC,
ConocoPhillips, ConocoPhillips Company, Phillips Chemical Holdings Company, WesTTex 66 Pipeline Co., Phillips
Petroleum International Corporation, Chevron Corporation, and Chevron U.S.A. Inc.
First Amendment to Consent Agreement, dated as of February 10, 2012, by and between Chevron Phillips Chemical
Company LLC, ConocoPhillips, ConocoPhillips Company, Phillips Chemical Holdings Company, WesTTex 66 Pipeline
Co., Phillips Petroleum International Corporation, Chevron Corporation, and Chevron U.S.A. Inc.
Third Amendment to the Second Amended and Restated Limited Liability Company Agreement of Chevron Phillips
Chemical Company LLC, dated February 10, 2012, by and between Chevron U.S.A. Inc., ConocoPhillips Company,
Phillips Chemical Holdings Company, WesTTex 66 Pipeline Company and Phillips Petroleum International Corporation.
Second Amended and Restated Limited Liability Company Agreement of Duke Energy Field Services, LLC, dated July 5,
2005, by and between ConocoPhillips Gas Company and Duke Energy Enterprises Corporation.
First Amendment to Second Amended and Restated Limited Liability Company Agreement of Duke Energy Field
Services, LLC, dated August 11, 2006, by and between ConocoPhillips Gas Company and Duke Energy Enterprises
Corporation.
Second Amendment to Second Amended and Restated Limited Liability Company Agreement of DCP Midstream, LLC
(formerly Duke Energy Field Services, LLC), dated February 1, 2007, by and between ConocoPhillips Gas Company,
Spectra Energy DEFS Holding, LLC, and Spectra Energy DEFS Holding Corp.
Third Amendment to Second Amended and Restated Limited Liability Company Agreement of DCP Midstream, LLC
(formerly Duke Energy Field Services, LLC), dated April 30, 2009, by and between ConocoPhillips Gas Company, Spectra
Energy DEFS Holding, LLC, and Spectra Energy DEFS Holding Corp.
Fourth Amendment to Second Amended and Restated Limited Liability Company Agreement of DCP Midstream, LLC
(formerly Duke Energy Field Services, LLC), dated November 9, 2010, by and between ConocoPhillips Gas Company,
Spectra Energy DEFS Holding, LLC, and Spectra Energy DEFS Holding Corp.
Preliminary Information Statement of Phillips 66, subject to completion, dated April 5, 2012.
*
Previously filed .
vii
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PHILLIPS 66
FIRST: The name of the Corporation is Phillips 66 (hereinafter the “Corporation”).
SECOND: The address of the registered office of the Corporation in the State of Delaware is [ 2711 Centerville Road, Suite 400, in
the City of Wilmington, County of New Castle ] . The name of its registered agent at that address is [ Corporation Service Company ] .
THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under
the General Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the “DGCL”).
FOURTH: A. AUTHORIZED SHARES. The total number of shares of stock that the Corporation shall have authority to issue is [
 ] ([  ]) of which (i) [  ] ([  ]) shares shall be shares of Common Stock, par value $.01 per share (the “Common Stock”), and (ii) [  ]
([  ]) shares shall be shares of Preferred Stock, par value $.01 per share (the “Preferred Stock”). The number of authorized shares of any of
the Preferred Stock or the Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority in voting power of the stock of the Corporation entitled to vote thereon irrespective of the
provisions of Section 242(b)(2) of the DGCL (or any successor provision thereto), and no vote of the holders of any of the Preferred Stock or
the Common Stock voting separately as a class shall be required therefor.
B. PREFERRED STOCK. The Board of Directors is hereby expressly authorized, by resolution or resolutions, to provide, out of the
unissued shares of Preferred Stock, for series of Preferred Stock and, with respect to each such series, to fix the number of shares constituting
such series and the designation of such series, and the voting powers, preferences and relative, participating, optional or other special rights, if
any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The voting powers, preferences and relative,
participating, optional and other special rights, if any, of each series of Preferred Stock, and any qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series at any time outstanding.
C. COMMON STOCK.
(1) Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of this Certificate of Incorporation
(“Certificate of Incorporation”), holders of Common Stock shall be entitled to receive such dividends and other distributions in cash, stock of
any corporation or property of the Corporation as may be declared thereon by the Board of Directors from time to time out of assets or funds of
the Corporation legally available therefor and shall share equally on a per share basis in all such dividends and other distributions.
(2) (a) At every meeting of the stockholders of the Corporation every holder of Common Stock shall be entitled to one vote in
person or by proxy for each share of Common Stock standing in his or her name on the transfer books of the Corporation in connection with the
election of directors and all other matters submitted to a vote of stockholders; provided, however, that, except as otherwise required by law,
holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any
Certificate of Designation relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of
Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series,
to vote thereon pursuant to this Certificate of Incorporation (including any Certificate of Designation relating to any series of Preferred Stock)
or pursuant to the DGCL.
(b) The affirmative vote of shares representing not less than 80% of the votes entitled to be cast by the Voting Stock shall be
required to alter, amend or adopt any provision inconsistent with or repeal paragraph (C)(4)(b) of this Article FOURTH, Article FIFTH, Article
SEVENTH or Article EIGHTH or any provision of this paragraph (C)(2)(b), and the affirmative vote of shares representing not less than 80%
of the votes entitled to be cast by the Voting Stock, acting on the unanimous recommendation of the entire Board of Directors, shall be required
to alter, amend or adopt any provision inconsistent with or repeal Article FIRST. “Voting Stock” shall mean the then outstanding shares of
capital stock entitled to vote generally on the election of directors and shall exclude any class or series of capital stock only entitled to vote in
the event of dividend arrearages thereon, whether or not at the time of determination there are any such dividend arrearages.
(c) Every reference in this Certificate of Incorporation to a majority or other proportion of shares, or a majority or other proportion
of the votes of shares, of Voting Stock shall refer to such majority or other proportion of the votes to which such shares of Voting Stock are
entitled.
(d) At any meeting of stockholders, the presence in person or by proxy of the holders of shares of capital stock entitled to cast a
majority of all the votes which could be cast at such meeting by the holders of all of the outstanding shares of capital stock of the Corporation
entitled to vote at such meeting shall constitute a quorum.
(3) In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary,
after payment in full of the amounts required to be paid to the holders of Preferred Stock, the remaining assets and funds of the Corporation
shall be distributed pro rata to the holders of Common Stock. For purposes of this paragraph (C)(3), the voluntary sale, conveyance, lease,
exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the assets of the Corporation or a
consolidation or merger of the Corporation with one or more other corporations or other entities (whether or not the Corporation is the
corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary.
(4) (a) All rights to vote and all voting power (including, without limitation thereto, the right to elect directors) shall be vested
exclusively in the holders of Common Stock, except as otherwise expressly provided in this Certificate of Incorporation, in a Certificate of
-2-
Designation with respect to any Preferred Stock or as otherwise expressly required by applicable law.
(b) No stockholder shall be entitled to exercise any right of cumulative voting.
FIFTH: A. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors. The total
number of directors constituting the entire Board shall be not less than [  ]nor more than [  ]as determined from time to time by resolution
adopted by affirmative vote of a majority of the entire Board of Directors. Commencing with the [2012] annual meeting of stockholders of the
Corporation, the directors, other than those who may be elected by the holders of any series of Preferred Stock under specified circumstances,
shall be divided, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as is reasonably
possible, with the term of office of the first class to expire at the [2013] annual meeting of stockholders, the term of office of the second class to
expire at the [2014] annual meeting of stockholders and the term of office of the third class to expire at the [2015] annual meeting of
stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of
stockholders, commencing with the [2013] annual meeting, directors elected to succeed those directors whose terms then expire shall be elected
for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until
his or her successor shall have been duly elected and qualified. Unless otherwise required by law, any vacancy on the Board of Directors or
newly created directorship may be filled only by a majority of the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been appointed expires and until their successors are duly elected and qualified, or until their earlier death,
resignation, removal or departure from the Board of Directors for other cause.
Notwithstanding the foregoing, whenever the holders of outstanding shares of one or more series of Preferred Stock are entitled to
elect a director or directors of the Corporation separately as a series or together with one or more other series pursuant to a resolution of the
Board of Directors providing for the establishment of such series, such director or directors shall not be subject to the foregoing provisions of
this Article FIFTH, and the election, term of office, removal and filling of vacancies in respect of such director or directors shall be governed
by the resolution of the Board of Directors so providing for the establishment of such series and by applicable law.
B. Subject to applicable law, any director or the entire Board of Directors may only be removed with cause, such removal to be by
the affirmative vote of the shares representing at least a majority of the votes entitled to be cast by the Voting Stock.
Notwithstanding the foregoing, whenever holders of outstanding shares of one or more series of Preferred Stock are entitled to elect
directors of the Corporation pursuant to the provisions applicable in the case of arrearages in the payment of dividends or other defaults
contained in the resolution or resolutions of the Board of Directors providing for the establishment of any such series, any such director of the
Corporation so elected may be removed in accordance with the provisions of such resolution or resolutions.
-3-
C. There shall be no limitation on the qualification of any person to be a director or on the ability of any director to vote on any
matter brought before the Board or any Board committee, except (i) as required by applicable law, (ii) as set forth in this Certificate of
Incorporation or (iii) any By-Law adopted by the Board of Directors with respect to the eligibility for election as a director or the qualification
for continuing service as a director upon reaching a specified age or, in the case of employee directors, with respect to the qualification for
continuing service of directors upon ceasing employment from the Corporation.
D. Except as (i) required by applicable law or (ii) set forth in this Certificate of Incorporation, at all meetings of the Board of
Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of the Board of Directors.
E. The following provisions are inserted for further definition, limitation and regulation of the powers of the Corporation and of its
directors and stockholders:
(1) The By-Laws of the Corporation may be adopted, altered, amended or repealed (i) by the affirmative vote of the shares
representing a majority of the votes entitled to be cast by the Voting Stock; PROVIDED, HOWEVER, that any proposed alteration,
amendment or repeal of, or the adoption of any By-Law inconsistent with, Section 3, 7, 10,11, 12 or 13 of Article II of the By-Laws or
Section 1, 2 or 11 of Article III of the By-Laws or Section 4, 5 or 12 of Article IV of the By-Laws (in each case, as in effect on the date hereof),
or the alteration, amendment or the repeal of, or the adoption of any provision inconsistent with this sentence, by the stockholders shall require
the affirmative vote of shares representing not less than 80% of the votes entitled to be cast by the Voting Stock; and PROVIDED, FURTHER,
HOWEVER, that in the case of any such stockholder action at a special meeting of stockholders, notice of the proposed alteration, amendment,
repeal or adoption of the new By-Law or By-Laws must be contained in the notice of such special meeting, or (ii) by action of the Board of
Directors of the Corporation; p rovided , however , that the case of any such action at a meeting of the Board of Directors, notice of the
proposed alteration, amendment, repeal or adoption of the new By-Law or By-Laws must be given not less than two days prior to the meeting.
The Provisions of this paragraph (E)(1) of this Article FIFTH are subject to Section 12 of Article IV of the By-Laws.
(2) In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to
the provisions of the DGCL, this Certificate of Incorporation, and any By-Laws adopted by the stockholders; PROVIDED, HOWEVER, that
no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such By-Laws
had not been adopted.
SIXTH: Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. The books of
the Corporation may be kept (subject to any provision contained in the DGCL) outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the By-Laws of the Corporation.
-4-
SEVENTH: Any action required or permitted to be taken by the stockholders of the Corporation may be effected only at a duly
called annual or special meeting of such holders and may not be effected by a consent in writing by such holders in lieu of such a meeting.
Except as otherwise required by law, special meetings of stockholders of the Corporation for any purpose or purposes may be called only by
the Board of Directors pursuant to a resolution stating the purpose or purposes thereof or by the Chairman of the Board of Directors of the
Corporation and any power of stockholders to call a special meeting is specifically denied. No business other than that stated in the notice of
such meeting shall be transacted at any special meeting.
EIGHTH: To the fullest extent that the DGCL or any other law of the State of Delaware as it exists or as it may hereafter be
amended permits the limitation or elimination of the liability of directors, no director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director. No amendment to or repeal of this Article EIGHTH shall apply to
or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
NINTH: The Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or
proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer
of the Corporation to the Corporation or the Corporation’s stockholders, creditors or other constituents, (iii) any action asserting a claim against
the Corporation or any director or officer of the Corporation arising pursuant to any provision of the Delaware General Corporation Law or the
Corporation’s Certificate of Incorporation or By-Laws (as either may be amended from time to time), or (iv) any action asserting a claim
against the Corporation or any director or officer of the Corporation governed by the internal affairs doctrine; provided, that, if and only if the
Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in
another court sitting in the State of Delaware.
-5-
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
PHILLIPS 66
(hereinafter called the “Corporation”)
ARTICLE I
Offices
Section 1. Registered Office. The registered office of the Corporation shall be in the [City of Wilmington, County of New Castle], State
of Delaware or at such place within the State of Delaware as the Board of Directors may from time to time determine.
Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the
Board of Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
Section 1. Place and Time of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at
such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors. Subject
to applicable law, the Board of Directors may elect to postpone any previously scheduled meeting of stockholders.
Section 2. Annual Meetings. The annual meetings of stockholders for the election of directors shall be held on such date and at such time
as shall be designated from time to time by the Board of Directors. Any other proper business may be transacted at the annual meeting of
stockholders.
Section 3. Special Meetings. Unless otherwise required by law or by the certificate of incorporation of the Corporation, as amended and
restated from time to time (including any certificates of designation with respect to any Preferred Stock, the “Certificate of Incorporation”),
special meetings of stockholders, for any purpose or purposes, may only be called by the Board of Directors pursuant to a resolution stating the
purpose or purposes thereof or by the Chairman, if there be one, and any power of stockholders to call a special meeting is specifically denied.
Notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be
given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such
meeting. Only such business shall be conducted at a special meeting as shall be specified in the notice of meeting (or any supplement thereto).
Section 4. Adjournments. Any meeting of the stockholders may be adjourned by the chairman of the meeting or by the stockholders or
their proxies in attendance, from time to time, to reconvene at the same or some other place, and notice need not be given of any such
adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
Section 5. Quorum. Unless otherwise required by law or the Certificate of Incorporation, the presence in person or by proxy of the
holders of shares of capital stock entitled to cast a majority of the votes which could be cast at such meeting by the holders of all the
outstanding shares of capital stock entitled to vote at such meeting shall constitute a quorum at all meetings of the stockholders for the
transaction of business. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If,
however, such quorum shall not be present or represented at any meeting of the stockholders, the chairman of the meeting or the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, in the manner
provided in Section 4, until a quorum shall be present or represented.
Section 6. Voting. Unless otherwise provided by law, the Certificate of Incorporation or these By-Laws or any rule or regulation of any
stock exchange or regulatory body applicable to the Corporation, any question brought before any meeting of stockholders, other than the
election of directors, shall be decided by the affirmative vote of the holders of a majority of the votes of shares of capital stock present in
person or represented by proxy at the meeting and entitled to vote on the question, voting as a single class. Every reference in these By-Laws to
a majority or other proportion of shares, or a majority or other proportion of the votes of shares, of capital stock shall refer to such majority or
other proportion of the votes to which such shares of capital stock are entitled as provided in the Certificate of Incorporation. Votes of
stockholders entitled to vote at a meeting of stockholders may be cast in person or by proxy but no proxy shall be voted on or after three years
from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation
presiding at a meeting of stockholders, in such officer’s discretion, may require that any votes cast at such meeting shall be cast by written
ballot.
Section 7. No Action by Consent of Stockholders in Lieu of Meeting. Any action required or permitted to be taken by the stockholders of
the Corporation may be effected only at a duly called annual or special meeting of such holders and may not be effected by a consent in writing
by such holders in lieu of such a meeting.
Section 8. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation
shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting for a period of at least
-2-
ten (10) days prior to the meeting, as required by applicable law. Subject to applicable law, the list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present.
Section 9. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 8 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting
of stockholders.
Section 10. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for
election as directors of the Corporation at an annual meeting of stockholders, except as may be otherwise provided in the Certificate of
Incorporation of the Corporation with respect to the right of holders of Preferred Stock of the Corporation to nominate and elect a specified
number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting
of stockholders only (a) pursuant to the Corporation’s notice of meeting, (b) by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the
notice provided for in this Section 10 and on the record date for the determination of stockholders entitled to vote at such annual meeting,
(ii) who is entitled to vote at the meeting and (iii) who complies with the notice procedures set forth in this Section 10. Compliance with the
provisions of clause (c) of the preceding sentence of this Section 10 shall be the exclusive means for a stockholder to make nominations before
an annual meeting of stockholders.
Without qualification or limitation, in addition to any other applicable requirements, for a nomination to be properly brought by a
stockholder at an annual meeting pursuant to the paragraph above, such stockholder must have given timely notice thereof in proper written
form to the Secretary of the Corporation.
To be timely, a stockholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices
of the Corporation not less than ninety (90) days nor more than one hundred and twenty (120) days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; provided , however , that in the event that the annual meeting is called for a date that is
not within thirty (30) days before or after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the
one hundred and twentieth (120th) day prior to the date of such annual meeting and not later than the close of business on the later of the
ninetieth (90th) day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than
one hundred (100) days prior to the date of such annual meeting, the tenth (10th) day following the day on which public announcement of the
date of such meeting is first made by the Corporation. In no event shall any adjournment or postponement of an annual meeting or the
announcement thereof commence a new time period for the giving of a stockholder’s notice as described above. To be in proper written form, a
stockholder’s notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection
as a director (i) all information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14 of the Exchange Act and
the rules and
-3-
regulations promulgated thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to
serving as a director if elected) and (ii) a description of all direct and indirect compensation and other material monetary agreements,
arrangements and understandings during the past three years, and any other material relationships, between or among such stockholder and
beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed
nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without
limitation, all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the stockholder
making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate thereof or person
acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such
registrant; (b) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made (i) the name and
record address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, if any, (ii) (A) the class or series
and number of shares of capital stock of the Corporation which are, directly or indirectly, owned beneficially or of record by such stockholder
and of such beneficial owner, (B) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or
conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value
derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be
subject to settlement in the underlying class or series of capital stock of the Corporation or otherwise (a “Derivative Instrument”) directly or
indirectly owned beneficially by such stockholder and any other direct or indirect opportunity to profit or share in any profit derived from any
increase or decrease in the value of shares of the Corporation, (C) any proxy, contract, arrangement, understanding, or relationship pursuant to
which such stockholder has a right to vote any shares of any security of the Company, (D) any short interest in any security of the Company
(for purposes of this Section 10 a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in
the value of the subject security), (E) any rights to dividends on the shares of the Corporation owned beneficially by such stockholder that are
separated or separable from the underlying shares of the Corporation, (F) any proportionate interest in shares of the Corporation or Derivative
Instruments held, directly or indirectly, by a general or limited partnership in which such stockholder is a general partner or, directly or
indirectly, beneficially owns an interest in a general partner and (G) any performance-related fees (other than an asset-based fee) that such
stockholder is entitled to based on any increase or decrease in the value of shares of the Corporation or Derivative Instruments, if any, as of the
date of such notice, including without limitation any such interests held by members of such stockholder’s immediate family sharing the same
household (which information shall be supplemented by such stockholder and beneficial owner, if any, not later than ten (10) days after the
record date for the meeting to disclose such ownership as of the record date), (iii) a description of all arrangements or understandings between
such stockholder and such beneficial owner, if any, and each proposed nominee and any other person or persons (including their names)
pursuant to which the nomination (s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person
or by proxy at the annual meeting to nominate the persons named in
-4-
its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for the election of directors in a contested election pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder, and (c) with respect to each nominee for election or reelection to the
Board of Directors, include a completed and signed questionnaire, representation and agreement required by Article II, Section 14 of these
By-Laws. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the
Corporation to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or that could be
material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee.
Notwithstanding anything in the second sentence of the preceding paragraph of this Section 10 to the contrary, in the event that the
number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased Board of Directors at least one hundred (100) days prior to the first anniversary
of the preceding year’s annual meeting, a stockholder’s notice required by this Section 10 shall also be considered timely, but only with respect
to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by
the Corporation.
No person shall be eligible for election as a director of the Corporation at an annual meeting of stockholders unless nominated in
accordance with the procedures set forth in this Section 10, and only such persons who are nominated in accordance with the procedures set
forth in this Section 10 or in Section 12 shall be eligible to serve as directors. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the Chairman of the meeting shall have the power and duty to determine whether a nomination proposed to be
brought before the meeting was made in accordance with the procedures set forth in this Section 10 and, if any proposed nomination is not in
compliance with this Section 10, to declare that such defective nomination shall be disregarded.
For purposes of this Section 10, “public announcement” shall mean disclosure in a press release reported by a national news service
or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Exchange Act and the rules and regulations promulgated thereunder.
Notwithstanding the foregoing provisions of this Section 10, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 10; provided, however, that any
references in these By-Laws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements
applicable to nominations to be considered pursuant to clause (c) of the first paragraph of this Section 10. Nothing in this Section 10 shall be
deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8
under the Exchange Act or (ii) of the holders of any series of Preferred Stock if and to the extent provided for under law, the Certificate of
Incorporation or these By-Laws.
-5-
Section 11. Business at Annual Meetings . No business may be transacted at an annual meeting of stockholders, other than business that is
either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly
authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any
duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who
is a stockholder of record on the date of the giving of the notice provided for in this Section 11 and on the record date for the determination of
stockholders entitled to vote at such annual meeting, (ii) who is entitled to vote at the meeting and (iii) who complies with the notice
procedures set forth in this Section 11. Compliance with the provisions of clause (c) of the preceding sentence of this Section 11 shall be the
exclusive means for a stockholder to submit other business (other than matters properly brought under Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) and included in the Corporation’s notice of meeting) before an annual meeting of
stockholders.
Without qualification or limitation, in addition to any other applicable requirements, for business to be properly brought before an
annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the
Corporation and such business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice to the Secretary
must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than
one hundred and twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided ,
however , that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date,
notice by stockholder to be timely must be so delivered not earlier than the one hundred and twentieth (120th) day prior to the date of such
annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to the date of such annual meeting or, if the
first public announcement of the date of such annual meeting is less than one hundred (100) days prior to the date of such annual meeting, the
tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event
shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a
stockholder’s notice as described above.
To be in proper written form, a stockholder’s notice to the Secretary must set forth as to each matter such stockholder proposes to
bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record address of such stockholder, and of such beneficial owner, if any,
(iii) (A) the class or series and number of shares of capital stock of the Corporation which are, directly or indirectly, owned beneficially or of
record by such stockholder and such beneficial owner, if any, (B) any Derivative Instrument directly or indirectly owned beneficially by such
stockholder and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of
shares of the Corporation, (C) any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder has a right
to vote any shares of any security of the Company, (D) any short interest in any security of the Company (for purposes of this Section 11 a
person shall be deemed to have a short interest in a security if such person directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has the
-6-
opportunity to profit or share in any profit derived from any decrease in the value of the subject security), (E) any rights to dividends on the
shares of the Corporation owned beneficially by such stockholder that are separated or separable from the underlying shares of the Corporation,
(F) any proportionate interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited
partnership in which such stockholder is a general partner or, directly or indirectly, beneficially owns an interest in a general partner and
(G) any performance-related fees (other than an asset-based fee) that such stockholder is entitled to based on any increase or decrease in the
value of shares of the Corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such
interests held by members of such stockholder’s immediate family sharing the same household (which information shall be supplemented by
such stockholder and beneficial owner, if any, not later than ten (10) days after the record date for the meeting to disclose such ownership as of
the record date), (iv) a description of all agreements, arrangements or understandings between such stockholder and beneficial owner and any
other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest
of such stockholder and beneficial owner in such business, (v) a representation that such stockholder intends to appear in person or by proxy at
the annual meeting to bring such business before the meeting and (vi) any other information relating to such stockholder that would be required
to be disclosed in a proxy statement or other filings required to be made in connection with the proposal of business.
No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in
accordance with the procedures set forth in this Section 11; provided , however , that, once business has been properly brought before the
annual meeting in accordance with such procedures, nothing in this Section 11 shall be deemed to preclude discussion by any stockholder of
any such business. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting shall
have the power and duty to determine whether any business proposed to be brought before the meeting was proposed in accordance with the
procedures set forth in this Section 11 and, if any proposed business is not in compliance with this Section 11, to declare that such defective
proposal shall be disregarded.
For purposes of this Section 11, “public announcement” shall mean disclosure in a press release reported by a national news service
or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Exchange Act and the rules and regulations promulgated thereunder.
Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 11; provided, however, that any
references in these By-Laws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements
applicable to nominations to be considered pursuant to clause (c) of the first paragraph of this Section 11. Nothing in this Section 11 shall be
deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8
under the Exchange Act, or (ii) of the holders of any series of Preferred Stock if and to the extent provided for under law, the Certificate of
Incorporation or these By-Laws.
-7-
Section 12. Nominations of Directors and Business at Special Meetings . Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting.
Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the Corporation’s notice of meeting only (a) by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any
stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 12 and at
the time of the special meeting, (ii) who is entitled to vote at the special meeting and (iii) who complies with the notice procedures set forth in
this Section 12 as to such nomination. Compliance with the provisions of clause (b) of the preceding sentence of this Section 12 shall be the
exclusive means for a stockholder to make nominations (other than matters properly brought under Rule 14a-8 under the Exchange Act and
included in the Corporation’s notice of meeting) before a special meeting of stockholders.
In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the
Corporation’s notice of meeting, if the stockholder’s notice identified in the second paragraph of Section 10 of these By-Laws (including the
completed and signed questionnaire, representation and agreement identified in Article II, Section 14 of these By-Laws) shall be delivered to
the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the one hundred and twentieth
(120th) day prior to such special meeting and not later than the close of business on the later of the ninetieth (90th) day prior to the date of such
special meeting or, if the first public announcement of the date of such special meeting is less than one hundred (100) days prior to the date of
such special meeting, the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall any adjournment or postponement of a
special meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described above.
No person shall be eligible for election at a special meeting of stockholders as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 12, and only such persons who are nominated in accordance with the procedures set
forth in Section 10 or in this Section 12 shall be eligible to serve as directors. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the Chairman of the special meeting shall have the power and duty to determine whether a nomination was
made in accordance with the procedures set forth in this Section 12 and, if any proposed nomination is not in compliance with this Section 12,
to declare that such defective nomination shall be disregarded.
For purposes of this Section 12, “public announcement” shall mean disclosure in a press release reported by a national news service
or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Exchange Act and the rules and regulations promulgated thereunder.
-8-
Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 12; provided , however , that any
references in these By-Laws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements
applicable to nominations to be considered pursuant to clause (c) of the first paragraph of this Section 12. Nothing in this Section 12 shall be
deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8
under the Exchange Act or (ii) of the holders of any series of Preferred Stock if and to the extent provided for under law, the Certificate of
Incorporation or these By-Laws.
Section 13. Required Vote for Directors .
(A) Majority Vote . Except in cases where, as of the meeting date, the number of nominees exceeds the number of directors to be
elected, each director to be elected by stockholders shall be elected by the vote of the majority of the votes cast at any meeting for the election
of directors at which a quorum is present. For purposes of this By-Law, a majority of votes cast shall mean that the number of shares voted
“for” a director’s election exceeds 50% of the number of votes cast with respect to that director’s election. Votes cast shall include votes to
withhold authority in each case and exclude abstentions with respect to that director’s election.
(B) Resignation . If a nominee for director who is an incumbent director is not elected and no successor has been elected at such
meeting, the director shall promptly tender his or her resignation to the Board of Directors pursuant to the agreement required by Section 14 of
these By-Laws. The Nominating and Governance Committee shall make a recommendation to the Board of Directors as to whether to accept or
reject the tendered resignation, or whether other action should be taken. The Board of Directors shall act on the tendered resignation taking into
account the recommendation of the Nominating and Governance Committee and publicly disclose (by a press release, a filing with the
Securities and Exchange Commission or other broadly disseminated means of communication) its decision regarding the tendered resignation
and the rationale behind the decision within 90 days from the date of the certification of the election results. The Nominating and Governance
Committee, in making its recommendation, and the Board of Directors, in making its decision, may each consider any factors or other
information that it considers appropriate and relevant. The director who tenders his or her resignation shall not participate in the
recommendation of the Nominating and Governance Committee or the decision of the Board of Directors with respect to his or her resignation.
If such incumbent director’s resignation is not accepted by the Board of Directors, such director shall continue to serve until his or her
successor is duly elected, or his or her earlier resignation or removal. If a director’s resignation is accepted by the Board of Directors pursuant
to this By-Law, or if a nominee for director is not elected and the nominee is not an incumbent director, then the Board of Directors, in its sole
discretion, may fill any resulting vacancy or unfilled, newly created directorship pursuant to the provisions of Article III, Section 2 of these
By-Laws or may decrease the size of the Board of Directors pursuant to the provisions of Article III, Section 1 of these By-Laws.
Section 14. Additional Required Information . To be eligible to be a nominee for election or reelection as a director of the Corporation, a
person must deliver (in accordance with the time periods prescribed for delivery of notice under Section 10 or Section 12, as applicable,
-9-
of this Article II) to the Secretary at the principal executive offices of the Corporation a written questionnaire with respect to the background
and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which form
of questionnaire shall be provided by the Secretary upon written request) and a written representation and agreement (in the form provided by
the Secretary upon written request) that such person (A) will abide by the requirements of Section 13 of this Article II, (B) is not and will not
become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or
entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that
has not been disclosed to the Corporation or (2) any Voting Commitment that could limit or interfere with such person’s ability to comply, if
elected as a director of the Corporation, with such person’s fiduciary duties under applicable law, (C) is not and will not become a party to any
agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect
compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, and
(D) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in
compliance, if elected as a director of the Corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of
interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation.
Section 15. Conduct of Meetings . The Board of Directors of the Corporation may adopt by resolution such rules and regulations for the
conduct of the meetings of the stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as
adopted by the Board of Directors, the chairman of any meeting of the stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting.
Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include,
without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) the determination of when the
polls shall open and close for any given matter to be voted on at the meeting; (iii) rules and procedures for maintaining order at the meeting and
the safety of those present; (iv) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their
duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (v) restrictions on entry to the
meeting after the time fixed for the commencement thereof; (vi) limitations on the time allotted to questions or comments by participants; and
(vii) policies and procedures with respect to the adjournment of such meeting.
ARTICLE III
Directors
Section 1. Number, Classification and Qualification of Directors. (a) The size of the Board of Directors shall be not less than [  ] and
not more than [  ] directors, with the exact number to be determined from time to time by the Board of Directors. No decrease in the number
of authorized directors shall shorten the term of any incumbent director. Commencing with the [2012] annual meeting of stockholders of the
Corporation, the directors, other than those who may be elected by the holders of any series of Preferred Stock under specified
-10-
circumstances, shall be divided, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as is
reasonably possible, with the term of office of the first class to expire at the [2013] annual meeting of stockholders, the term of office of the
second class to expire at the [2014] annual meeting of stockholders and the term of office of the third class to expire at the [2015] annual
meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the [2013] annual meeting, (i) directors elected to succeed those directors whose terms then expire
shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to
hold office until his or her successor shall have been duly elected and qualified, and (ii) if authorized by a resolution of the Board of Directors,
directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. Any director
may resign at any time upon written notice to the Corporation. Directors need not be stockholders. Subject to applicable law and to the
provisions of Article II of these By-Laws, any person shall be eligible for election as a director; provided that (i) in the case of a director who is
also an employee of the Corporation, any person who ceases to be an employee of the Corporation shall be disqualified from continued service
as a director and such person’s term of office as a director shall automatically terminate and (ii) in the case of any director, (A) any person who
shall have attained the age of 72 shall be ineligible for election or appointment as a director and (B) a director’s term of office shall
automatically terminate as of the Company’s next annual shareholder meeting following such director attaining the age of 72.
(b) There shall be no limitation on the qualification of any person to be a director or on the ability of any director to vote on any
matter brought before the Board or any Board committee, except (i) as required by applicable law, (ii) as set forth in the Certificate of
Incorporation or (iii) as set forth in the foregoing Section 1(a) of this Article III or (iv) in any By-Law adopted by the Board of Directors with
respect to the eligibility for election as a director upon reaching a specified age or, in the case of employee directors, with respect to the
qualification for continuing service of directors upon cessation of employment with the Corporation.
Section 2. Vacancies . Unless otherwise required by law or the Certificate of Incorporation, vacancies arising through death, resignation,
removal, an increase in the number of directors or otherwise may be filled only by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so chosen shall hold office for a term expiring at the annual meeting of stockholders
at which the term of office of the class to which they have been appointed expires and until their successors are duly elected and qualified, or
until their earlier death, resignation, removal or departure from the Board of Directors for other cause.
Section 3. Duties and Powers . The business and affairs of the Corporation shall be managed by or under the direction of the Board of
Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the
Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders.
-11-
Section 4. Meetings . The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware.
Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined
by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman of the Board, if there be one, the
President, or such number of directors constituting more than one-third of the directors then in office. Notice thereof stating the place, date and
hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the time of the meeting, by
telephone, telegram, facsimile transmission or other electronic transmission not less than twenty-four (24) hours before the time of the meeting,
or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances.
Section 5. Quorum . Except as otherwise required by law or the Certificate of Incorporation, at all meetings of the Board of Directors, a
majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the
meeting of the time and place of the adjourned meeting, until a quorum shall be present.
Section 6. Actions by Written Consent of the Board . Unless otherwise provided in the Certificate of Incorporation or these By-Laws, any
action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if
all the members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and the
writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone . Unless otherwise provided in the Certificate of Incorporation, members of the
Board of Directors of the Corporation, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by
means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each
other, and participation in a meeting pursuant to this Section 7 shall constitute presence in person at such meeting.
Section 8. Standing Committees . (a) The Board of Directors, by resolution adopted by a majority of the entire Board, shall appoint from
among its members (i) an Executive Committee, (ii) an Audit and Finance Committee, (iii) a Compensation Committee, (iv) a Nominating and
Governance Committee and (v) a Public Policy Committee (together, the “Standing Committees”) each consisting of three (3) (or such greater
number as the Board of Directors may designate) directors, to perform the functions assigned to such committees by committee charters
adopted by the Board of Directors.
(b) The Executive Committee shall have and may exercise all the powers and authority of the Board of Directors in the management
of the business and affairs of the
-12-
Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it, in each case, to the fullest extent
permitted by applicable law.
Section 9. Committees . The Board of Directors may designate one or more other committees (in addition to the Standing Committees),
each such other committee to consist of one or more of the directors of the Corporation. With respect to all Board committees, the Board of
Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at
any meeting of any such committee. With respect to all Board committees, in the absence or disqualification of a member of a committee, and
in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or
members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any
Board committee, to the extent permitted by law and provided in the resolution establishing such committee, shall have and may exercise all
the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal
of the Corporation to be affixed to all papers which may require it. Each Board committee shall keep regular minutes and report to the Board of
Directors when required.
Section 10. Compensation . The directors shall be paid their expenses, if any, of attendance at each meeting of the Board of Directors or
any committee thereof and shall receive such compensation for their services as directors and as members of Board committees as shall be
determined by the Board of Directors. No such payment shall preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
Section 11. Removal . Subject to applicable law and the rights of the holders of any series of Preferred Stock with respect to such series
of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the
affirmative vote of the shares representing a majority of the votes entitled to be cast by the Voting Stock, voting together as a single class. For
purposes of these By-Laws, Voting Stock shall mean the then outstanding shares of capital stock entitled to vote generally in the election of
directors and shall exclude any class or series of capital stock only entitled to vote in the event of dividend arrearages thereon, whether or not at
the time of determination there are any dividend arrearages. Notwithstanding the foregoing, whenever holders of outstanding shares of one or
more series of Preferred Stock are entitled to elect directors of the Corporation pursuant to the provisions applicable in the case of arrearages in
the payment of dividends or other defaults contained in the resolution or resolutions of the Board of Directors providing for the establishment
of any such series, any such director of the Corporation so elected may be removed in accordance with the provisions of such resolution or
resolutions.
Section 12. Ratification . Any transaction questioned in any stockholders’ derivative proceeding on the ground of lack of authority,
defective or irregular execution, adverse interest of director, officer or stockholder, non-disclosure, miscomputation, or the application of
improper principles or practices of accounting may be ratified before or after judgment by the Board of Directors or, if less than a quorum of
directors is qualified, by a committee of qualified directors or by the stockholders; and, if so ratified, shall have the same force and effect as if
the
-13-
questioned transaction had been originally duly authorized, and said ratification shall be binding upon the Corporation and its stockholders and
shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction.
ARTICLE IV
Officers
Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall include a Chief Executive Officer;
President, a Secretary and a Treasurer. The Board of Directors, in its discretion, also may choose a Chairman of the Board (who must be a
director) and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by
the same person, unless otherwise prohibited by law or the Certificate of Incorporation. The officers of the Corporation need not be
stockholders of the Corporation nor, except in the case of the Chairman of the Board, need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors, at its first meeting held after each annual meeting of stockholders, shall elect the officers of
the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or
until their earlier death, resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative
vote of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President
or any Vice President or any other officer authorized to do so by the Board of Directors and any such officer may, in the name of and on behalf
of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders
of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and
power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at meetings of the Board and of the
Corporation’s stockholders. The Chairman shall have all the customary duties and responsibilities of such office.
Section 5. Chief Executive Officer. The Chief Executive Officer shall have general responsibility for the management of the Corporation
as provided in these By-laws, reporting directly to the Board of Directors. The Chief Executive Officer shall have all the customary duties and
responsibilities of such office, and all of the Corporation’s executive officers shall report directly to him or indirectly to him through another
such executive officer who reports to him.
-14-
Section 6. President. The President may be Chief Executive Officer if so designated by the Board. If the President and Chief Executive
Officer are not the same person, the President shall perform such duties and have such other powers as the Board of Directors from time to time
may prescribe. At the request of the Chief Executive Officer or in the Chief Executive Officer’s absence or in the event of the Chief Executive
Officer’s inability or refusal to act (and if there be no Chairman of the Board), the President, to the extent expressly authorized at such time by
the Board of Directors, shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the Chief Executive Officer. The President shall perform such other duties and have such other powers as the Board
of Directors from time to time may prescribe. If there be no Chairman of the Board and no President, the Board of Directors shall designate the
officer of the Corporation who, in the absence of the Chief Executive Officer or in the event of the inability or refusal of the Chief Executive
Officer to act, shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer.
Section 7. Vice Presidents. Vice Presidents, if there be any, shall perform such duties and have such powers as the Board of Directors
from time to time may prescribe and in the absence of the President or in the event of the President’s disability or refusal to act, shall perform
the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President.
Section 8. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for committees of the Board of
Directors when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board or the Chief
Executive Officer, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of
all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of
Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the
Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of the Corporation and to attest to the affixing by such officer’s
signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or
filed are properly kept or filed, as the case may be.
Section 9. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts
of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name
-15-
and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds
of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the
President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions as
Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a
bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of
the office of the Treasurer and for the restoration to the Corporation, in case of the Treasurer’s death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever kind in the Treasurer’s possession or under the Treasurer’s control
belonging to the Corporation.
Section 10. Assistant Secretaries. Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Secretary, and in the absence
of the Secretary or in the event of the Secretary’s disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the Secretary.
Section 11. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Treasurer, and in the absence
of the Treasurer or in the event of the Treasurer’s disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer
shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of the office of Assistant Treasurer and for the restoration to the Corporation, in case of the Assistant Treasurer’s
death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the
Assistant Treasurer’s possession or under the Assistant Treasurer’s control belonging to the Corporation.
Section 12. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as
from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the
Corporation the power to choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
Stock
Section 1. Uncertificated and Certificated Shares; Form of Certificates. Effective at such time as the President or any Vice President or
the Treasurer of the Corporation, if so authorized by resolution of the Board of Directors, designates in writing to the Corporate Secretary and
any transfer agents of the Corporation with respect to any class of stock of the Corporation, the shares of such class shall be uncertificated
shares, provided that the foregoing shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation.
-16-
Section 2. Signatures. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who
has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or
registrar at the date of issue.
Section 3. Lost Certificates. Any officer designated by the Board of Directors may direct a new certificate to be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, such officer may, in
his or her discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or the
owner’s legal representative, to advertise the same in such manner as such officer shall require and/or to give the Corporation a bond in such
sum as such officer may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen or destroyed or the issuance of such new certificate.
Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of
stock shall be made on the books of the Corporation only by the person named as the holder thereof on the stock records of the Corporation by
such person’s attorney lawfully constituted in writing, and in the case of shares represented by a certificate upon the surrender of the certificate
therefor, which shall be canceled before a new certificate shall be issued. No transfer of stock shall be valid as against the Corporation for any
purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. To the
extent designated by the President or any Vice President or the Treasurer of the Corporation, the Corporation may recognize the transfer of
fractional uncertificated shares, but shall not otherwise be required to recognize the transfer of fractional shares.
Section 5. Record Date.
(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days
before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or,
if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided , however , that the
Board of Directors may fix a new record date for the adjourned meeting.
-17-
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or
allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date
is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
Section 6. Record Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as
the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any
other person, whether or not it shall have express or other notice thereof, except as otherwise required by law.
ARTICLE VI
Notices
Section 1. Notices. Whenever notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder,
at such person’s address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail. Except as otherwise required by law, notice may also be given
personally, or by courier, telephone, electronic mail, facsimile transmission, cable, internet or other electronic transmission. Notice by courier
shall be deemed to be given when deposited with or delivered to a courier properly addressed. Telephone notice shall be deemed to be given
when such person or his or her agent is personally given such notice in a telephone call to which such person or his or her agent is a party.
Electronic mail notice shall be deemed to be given when directed to an electronic mail address at which such person has consented to receive
notice. Facsimile transmission notice shall be deemed to be given when directed to a number at which such person has consented to receive
notice.
Section 2. Waivers of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to
any director, member of a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, or a
waiver by electronic transmission by the person entitled to such notice, whether before or after the time stated therein, shall be deemed
equivalent thereto. Attendance of a person at a meeting (including, in the case of a stockholder, by proxy) shall constitute a waiver of notice of
such meeting, except where the person attends the meeting for the express purpose of objecting at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully called or convened.
-18-
ARTICLE VII
General Provisions
Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the requirements of the Delaware General
Corporation Law and the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or
special meeting of the Board of Directors (or any action by written consent in lieu thereof in accordance with Section 6 of Article III hereof),
and may be paid in cash, in property, or in shares of the Corporation’s capital stock. Before payment of any dividend, there may be set aside out
of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion,
deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or
such other person or persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and
the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE VIII
Indemnification
Section 1. Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation. Subject to
Section 3 of this Article VIII, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by
reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director, officer or employee of the
Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise (any director or officer of the Corporation or director, officer or employee of the Corporation so
serving at the request of the Corporation being referred to hereinafter as an “Indemnified Person”), shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be
amended or modified from time to time (but, in the case of any such amendment or modification, only to the extent that such amendment or
modification permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior
-19-
to such amendment or modification), against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the
Indemnified Person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct
was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article
VIII, any Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit
by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director, officer or employee of the Corporation serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be indemnified and
held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or
may hereafter be amended or modified from time to time (but, in the case of any such amendment or modification, only to the extent that such
amendment or modification permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment or modification), against expenses (including attorneys’ fees) actually and reasonably incurred by such person
in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the
circumstances because such claimant has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the
case may be. Such determination shall be made, with respect to a claimant who is a director or officer at the time of such determination, (1) if
requested by the claimant, by Independent Counsel (as hereinafter defined), or (2) if no request is made by the claimant for a determination by
Independent Counsel, (i) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter
defined), or (ii) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum
of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be
-20-
delivered to the claimant, or (iii) if a quorum of Disinterested Directors so directs, by the stockholders of the Corporation. In the event the
determination of entitlement to indemnification is to be made by Independent Counsel at the request of the claimant, the Independent Counsel
shall be selected by the Board of Directors unless there shall have occurred within two years prior to the date of the commencement of the
action, suit or proceeding for which indemnification is claimed a Change of Control as defined in the Corporation’s Stock Option Program
dated as of February 14, 2008, in which case the Independent Counsel shall be selected by the claimant unless the claimant shall request that
such selection be made by the Board of Directors. To the extent, however, that a present or former director or officer of the Corporation has
been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in
connection therewith, without the necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have
acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with
respect to any criminal action or proceeding, to have had no reasonable cause to believe such person’s conduct was unlawful, if such person’s
action is based on good faith reliance on the records or books of account of the Corporation or another enterprise, or on information supplied to
such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the
Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an
independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another
enterprise. The term “another enterprise” as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer,
employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any Indemnified Person may apply to the Court of Chancery in the
State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of such
indemnification by a court shall be a determination by such court that indemnification of the Indemnified Person is proper in the circumstances
because such person has met the applicable standards of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be. Neither a
contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a
defense to such application or create a presumption that Indemnified Person seeking indemnification has not met any applicable standard of
conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of
such application. If successful, in whole or in part, the Indemnified Person seeking indemnification shall also be entitled to be paid the expense
of prosecuting such application.
-21-
Section 6. Expenses Payable in Advance. Expenses incurred by an Indemnified Person in defending any civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such Indemnified Person to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided
by or granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under the Certificate of Incorporation, any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being
the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest
extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not
specified in Section 1 or 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the
Delaware General Corporation Law, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain insurance on behalf of any Indemnified Person against any liability
asserted against such person and incurred by such person by reason of the fact that such person is or was a director or officer of the Corporation
or is or was a director, officer or employee of the Corporation serving at the request of the Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or arising out of such person’s status as such,
whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of
this Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII, references to “the Corporation” shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director
or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such
constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving
corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this
Article VIII, references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references
to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries;
and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in
this
-22-
Article VIII. For purposes of this Article VIII, references to “Independent Counsel” shall mean a law firm, a member of a law firm, or an
independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of
professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the claimant in an action to
determine the claimant’s rights under this By-Law. For purposes of this Article VIII, “Disinterested Director” shall mean a director of the
Corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant.
Section 10. Contractual Nature, Vesting, and Survival of Rights to Indemnification and Advancement of Expenses. The rights to
indemnification and advancement of expenses conferred upon or granted to indemnitees in or pursuant to this By-Law or other By-Laws shall
be contract rights that vest at the time of such person’s service to or at the request of the Corporation and such rights shall continue as to an
indemnitee who has ceased to be a director, officer, trustee, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors
and administrators. Such rights cannot be terminated by the Corporation, the Board of Directors or the stockholders of the Corporation with
respect to a person’s service prior to the date of such termination. Any amendment, modification, alteration or repeal of this By-Law that in any
way diminishes, limits, restricts, adversely affects or eliminates any right of an indemnitee or his or her successors to indemnification,
advancement of expenses or otherwise shall be prospective only and shall not in any way diminish, limit, restrict, adversely affect or eliminate
any such right with respect to any actual or alleged state of facts, occurrence, action or omission then or previously existing, or any action, suit
or proceeding previously or thereafter brought or threatened based in whole or in part upon any such actual or alleged state of facts, occurrence,
action or omission.
Section 11. Limitation on Indemnification. Notwithstanding anything contained in this Article VIII to the contrary, except for
proceedings to enforce rights to indemnification (which shall be governed by Section 5 of this Article VIII), the Corporation shall not be
obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding
(or part thereof) was authorized or consented to by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those
conferred in this Article VIII to directors and officers of the Corporation.
ARTICLE IX
Amendments
Section 1. Amendments. These By-Laws may be altered, amended or repealed, in whole or in part, and new By-Laws may be adopted
(i) by the affirmative vote of the shares representing a majority of the votes entitled to be cast by the Voting Stock; [ provided , however , that
any proposed alteration, amendment or repeal of, or the adoption of any By-Law inconsistent with, Section 3, 7, 10, 11, 12 or 13 of Article II of
these By-Laws or Section 1, 2 or
-23-
11 of Article III of these By-Laws or this sentence, by the stockholders shall require the affirmative vote of shares representing not less than
80% of the votes entitled to be cast by the Voting Stock; and provided further , however , that in the case of any such stockholder action at a
meeting of stockholders, notice of the proposed alteration, amendment, repeal or adoption of the new By-Law or By-Laws must be contained in
the notice of such meeting, or (ii) by action of the Board of Directors of the Corporation; p rovided , however , that the case of any such action
at a meeting of the Board of Directors, notice of the proposed alteration, amendment, repeal or adoption of the new By-Law or By-Laws must
be given not less than two days prior to the meeting. The provisions of this Section 1 are subject to any provisions requiring a greater vote that
are set forth in the Certificate of Incorporation and in Section 12 of Article IV of these By-Laws.
Section 2. Entire Board of Directors. As used in these By-Laws generally, the term “entire Board of Directors” means the total number of
directors the Corporation would have if there were no vacancies.
Adopted on [  ], 2012
-24-
Exhibit 4.3
PHILLIPS 66
as Issuer
and
PHILLIPS 66 COMPANY
as Guarantor
and
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.
as Trustee
Indenture
Dated as of March 12, 2012
Debt Securities
PHILLIPS 66
RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939
AND INDENTURE, DATED AS OF MARCH 12, 2012
Section of Trust Indenture Act of 1939
Section 310
Section 311
Section 312
Section 313
Section 314
Section 315
Section 316
Section 317
Section(s) of Indenture
(a)(1)
(a)(2)
(a)(3)
(a)(4)
(a)(5)
(b)
(a)
(b)
(c)
(a)
(b)
(c)
(a)
(b)
(c)
(d)
(a)
(b)
(c)(1)
(c)(2)
(c)(3)
(d)
(e)
(a)
(b)
(c)
(d)
(d)(1)
(d)(2)
(d)(3)
(e)
(a)(1)(A)
(a)(1)(B)
(a)(2)
(a)(last sentence)
(b)
(a)(1)
7.10
7.10
Not Applicable
Not Applicable
7.10
7.08, 7.10
7.11
7.11
Not Applicable
2.07
11.03
11.03
7.06
7.06
7.06
7.06
4.03, 4.04
Not Applicable
11.04
11.04
Not Applicable
Not Applicable
11.05
7.01(b)
7.05
7.01(a)
7.01(c)
7.01(c)(1)
7.01(c)(2)
7.01(c)(3)
6.11
6.05
6.04
Not Applicable
2.11
6.07
6.08
-i-
Section 318
(a)(2)
(b)
(a)
6.09
2.06
11.01
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.
-ii-
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01
Definitions
SECTION 1.02
Other Definitions
SECTION 1.03
Incorporation by Reference of Trust Indenture Act
SECTION 1.04
Rules of Construction
ARTICLE II
THE SECURITIES
SECTION 2.01
Amount Unlimited; Issuable in Series
SECTION 2.02
Denominations
SECTION 2.03
Forms Generally
SECTION 2.04
Execution, Authentication, Delivery and Dating
SECTION 2.05
Registrar and Paying Agent
SECTION 2.06
Paying Agent to Hold Money in Trust
SECTION 2.07
Holder Lists
SECTION 2.08
Transfer and Exchange
SECTION 2.09
Replacement Securities
SECTION 2.10
Outstanding Securities
SECTION 2.11
Original Issue Discount, Foreign-Currency Denominated and Treasury Securities
SECTION 2.12
Temporary Securities
SECTION 2.13
Cancellation
SECTION 2.14
Payments; Defaulted Interest
SECTION 2.15
Persons Deemed Owners
SECTION 2.16
Computation of Interest
SECTION 2.17
Global Securities; Book-Entry Provisions
SECTION 2.18
CUSIP Numbers
ARTICLE III
REDEMPTION
SECTION 3.01
Applicability of Article
SECTION 3.02
Notice to the Trustee
SECTION 3.03
Selection of Securities To Be Redeemed
SECTION 3.04
Notice of Redemption
SECTION 3.05
Effect of Notice of Redemption
SECTION 3.06
Deposit of Redemption Price
SECTION 3.07
Securities Redeemed or Purchased in Part
SECTION 3.08
Purchase of Securities
SECTION 3.09
Mandatory and Optional Sinking Funds
SECTION 3.10
Satisfaction of Sinking Fund Payments with Securities
SECTION 3.11
Redemption of Securities for Sinking Fund
ARTICLE IV
COVENANTS SECTION
SECTION 4.01
Payment of Securities
SECTION 4.02
Maintenance of Office or Agency
SECTION 4.03
SEC Reports; Financial Statements
-iii-
1
1
7
7
8
8
8
11
11
12
14
14
15
15
16
16
16
17
17
17
18
18
18
20
21
21
21
21
21
22
22
23
23
23
24
24
25
25
25
26
SECTION 4.04
Compliance Certificate
SECTION 4.05
Corporate Existence
SECTION 4.06
Waiver of Stay, Extension or Usury Laws
SECTION 4.07
Additional Amounts
SECTION 4.08
Limitation on Liens
SECTION 4.09
Limitation on Sale/Leaseback Transactions
ARTICLE V
SUCCESSORS SECTION
SECTION 5.01
Limitations on Mergers and Consolidations
SECTION 5.02
Successor Person Substituted
ARTICLE VI
DEFAULTS AND REMEDIES SECTION
SECTION 6.01
Events of Default
SECTION 6.02
Acceleration
SECTION 6.03
Other Remedies
SECTION 6.04
Waiver of Defaults
SECTION 6.05
Control by Majority
SECTION 6.06
Limitations on Suits
SECTION 6.07
Rights of Holders to Receive Payment
SECTION 6.08
Collection Suit by Trustee
SECTION 6.09
Trustee May File Proofs of Claim
SECTION 6.10
Priorities
SECTION 6.11
Undertaking for Costs
ARTICLE VII
TRUSTEE SECTION
SECTION 7.01
Duties of Trustee
SECTION 7.02
Rights of Trustee
SECTION 7.03
May Hold Securities
SECTION 7.04
Trustee’s Disclaimer
SECTION 7.05
Notice of Defaults
SECTION 7.06
Reports by Trustee to Holders
SECTION 7.07
Compensation and Indemnity
SECTION 7.08
Replacement of Trustee
SECTION 7.09
Successor Trustee by Merger, etc.
SECTION 7.10
Eligibility; Disqualification
SECTION 7.11
Preferential Collection of Claims Against the Company or the Guarantor
ARTICLE VIII
DISCHARGE OF INDENTURE
SECTION 8.01
Termination of the Company’s and the Guarantor’s Obligations
SECTION 8.02
Application of Trust Money
SECTION 8.03
Repayment to Company or Guarantor
SECTION 8.04
Reinstatement
ARTICLE IX
SUPPLEMENTAL INDENTURES AND AMENDMENTS
-iv-
26
27
27
27
27
28
29
29
29
30
30
32
32
32
33
33
33
34
34
34
35
35
35
36
38
38
38
38
39
39
41
41
42
42
42
46
46
46
47
SECTION 9.01
SECTION 9.02
SECTION 9.03
SECTION 9.04
SECTION 9.05
SECTION 9.06
ARTICLE X
GUARANTEE
SECTION 10.01
SECTION 10.02
SECTION 10.03
SECTION 10.04
SECTION 10.05
ARTICLE XI
MISCELLANEOUS
SECTION 11.01
SECTION 11.02
SECTION 11.03
SECTION 11.04
SECTION 11.05
SECTION 11.06
SECTION 11.07
SECTION 11.08
SECTION 11.09
SECTION 11.10
SECTION 11.11
SECTION 11.12
SECTION 11.13
SECTION 11.14
Without Consent of Holders
With Consent of Holders
Compliance with Trust Indenture Act
Revocation and Effect of Consents
Notation on or Exchange of Securities
Trustee to Sign Amendments, etc.
47
48
50
50
50
51
Guarantee
Proceedings Against Guarantor
Subrogation
Guarantee for Benefit of Holders
Effectiveness of Guarantee
51
51
52
52
53
53
Trust Indenture Act Controls
Notices
Communication by Holders with Other Holders
Certificate and Opinion as to Conditions Precedent
Statements Required in Certificate or Opinion
Rules by Trustee and Agents
Legal Holidays
No Recourse Against Others
Governing Law; Waiver of Jury Trial
No Adverse Interpretation of Other Agreements
Successors
Severability
Counterpart Originals
Table of Contents, Headings, etc.
53
53
53
55
55
55
56
56
56
56
56
56
57
57
57
-v-
INDENTURE dated as of March 12, 2012 among Phillips 66, a Delaware corporation (the “Company”), Phillips 66 Company, a
Delaware corporation (the “Guarantor”), and The Bank of New York Mellon Trust Company, N.A., a national banking association, as trustee
(the “Trustee”).
Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Company’s
unsecured debentures, notes or other evidences of indebtedness (the “Securities”) to be issued from time to time in one or more series as
provided in this Indenture:
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01 Definitions.
“Additional Amounts” means any additional amounts required by the express terms of a Security or by or pursuant to a Board Resolution,
under circumstances specified therein or pursuant thereto, to be paid by the Company or the Guarantor, as the case may be, with respect to
certain taxes, assessments or other governmental charges imposed on certain Holders and that are owing to such Holders.
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by, or under direct or indirect
common control with, such specified Person. For purposes of this definition, “control” of a Person shall mean the power to direct the
management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise,
and the terms “controlling” and “controlled” shall have meanings correlative to the foregoing.
“Agent” means any Registrar or Paying Agent.
“Attributable Debt,” when used with respect to any Sale/Leaseback Transaction, means, as at the time of determination, the present value
(discounted at the rate set forth or implicit in the terms of the lease included in such transaction) of the total obligations of the lessee for rental
payments (other than amounts required to be paid on account of taxes, maintenance, repairs, insurance, assessments, utilities, operating and
labor costs and other items which do not constitute payments for property rights) during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been extended). In the case of any lease which is terminable by the
lessee upon the payment of a penalty, such net amount shall be the lesser of the net amount determined assuming termination upon the first date
such lease may be terminated (in which case the net amount shall also include the amount of the penalty, but no rent shall be considered as
required to be paid under such lease subsequent to the first date upon which it may be so terminated) or the net amount determined assuming no
such termination.
“Bankruptcy Law” means Title 11 of the United States Code or any similar federal, state or foreign law for the relief of debtors.
-1-
“Board of Directors,” when used with reference to the Company or the Guarantor, means the Board of Directors of the Company or the
Guarantor, as the case may be, or any committee thereof duly authorized, with respect to any particular matter, to act by or on behalf of the
Board of Directors of the Company or the Guarantor, as the case may be.
“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company or the Guarantor to
have been duly adopted by the Board of Directors of the Company or the Guarantor, as the case may be, and to be in full force and effect on the
date of such certification, and delivered to the Trustee.
“Business Day” means any day that is not a Legal Holiday.
“Company” means the Person named as the “Company” in the first paragraph of this instrument until a successor Person shall have
become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor Person; provided,
however, that for purposes of any provision contained herein which is required by the TIA, “Company” shall also mean each other obligor (if
any), other than the Guarantor, on the Securities of a series.
“Company Order” and “Company Request” mean, respectively, a written order or request signed in the name of the Company by two
Officers of the Company and, in the case of a Company Order pursuant to Section 2.01 or 2.04, in the name of the Guarantor by an Officer of
the Guarantor, and delivered to the Trustee.
“Consolidated Adjusted Net Assets” means the total amount of assets less (1) all current liabilities (excluding the amount of those
liabilities which are by their terms extendable or renewable at the option of the obligor to a date more than 12 months after the date as of which
the amount is being determined and current maturities of long-term debt) and (2) total prepaid expenses and deferred charges, all as set forth on
the most recent quarterly balance sheet of the Company and its consolidated subsidiaries and determined in accordance with GAAP.
“Corporate Trust Office of the Trustee” means the office of the Trustee located at 601 Travis Street, 16 th Floor, Houston, Texas 77002,
Attention: Corporate Trust Administration, and as may be located at such other address as the Trustee may give notice to the Company and the
Guarantor.
“Debt” means all notes, bonds, debentures or other similar evidences of debt for money borrowed.
“Default” means any event, act or condition that is, or after notice or the passage of time or both would be, an Event of Default.
“Depositary” means, with respect to the Securities of any series issuable or issued in whole or in part in global form, the Person specified
pursuant to Section 2.01 hereof as the initial Depositary with respect to the Securities of such series, until a successor shall have been appointed
and become such pursuant to the applicable provision of this Indenture, and thereafter “Depositary” shall mean or include such successor.
-2-
“Dollar” or “$” means a dollar or other equivalent unit in such coin or currency of the United States as at the time shall be legal tender for
the payment of public and private debt.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor statute.
“Funded Debt” means all Debt (including Debt incurred under any revolving credit, letter of credit or working capital facility) that
matures by its terms, or that is renewable at the option of any obligor thereon to a date, more than one year after the date on which such Debt is
originally incurred.
“GAAP” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect from time to time.
“Global Security” means a Security that is issued in global form in the name of the Depositary with respect thereto or its nominee.
“Government Obligations” means, with respect to a series of Securities, direct obligations of the government that issues the currency in
which the Securities of the series are payable for the payment of which the full faith and credit of such government is pledged, or obligations of
a Person controlled or supervised by and acting as an agency or instrumentality of such government, the payment of which is unconditionally
guaranteed as a full faith and credit obligation by such government.
“Guarantee” shall mean the guarantee of the Company’s obligations under the Securities by the Guarantor as provided in Article X.
“Guarantor” means the Person named as a “Guarantor” in the first paragraph of this instrument, until a successor to such Person shall
have become such pursuant to the applicable provisions of this Indenture, and thereafter “Guarantor” shall mean such successor Person.
“Holder” means a Person in whose name a Security is registered.
“Indenture” means this Indenture as amended or supplemented from time to time pursuant to the provisions hereof, and includes the terms
of a particular series of Securities established as contemplated by Section 2.01.
“interest” means, when used with respect to an Original Issue Discount Security that by its terms bears interest only after Maturity,
interest payable after Maturity.
“Interest Payment Date,” when used with respect to any Security, shall have the meaning assigned to such term in the Security as
contemplated by Section 2.01.
-3-
“Issue Date” means, with respect to Securities of a series, the date on which the Securities of such series are originally issued under this
Indenture.
“Legal Holiday” means a Saturday, a Sunday or a day on which banking institutions in any of The City of New York, New York;
Houston, Texas or a Place of Payment are authorized or obligated by law, regulation or executive order to remain closed.
“Lien” means any mortgage, pledge, lien or security interest.
“Maturity” means, with respect to any Security, the date on which the principal of such Security or an installment of principal becomes
due and payable as therein or herein provided, whether at the Stated Maturity thereof, or by declaration of acceleration, call for redemption or
otherwise.
“Officer” means the Chairman of the Board, the President, any Vice Chairman of the Board, any Vice President, the Chief Financial
Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary of a Person.
“Officers’ Certificate” means a certificate signed by two Officers of a Person and, in the case of an Officers’ Certificate of the Company
pursuant to Section 2.01 or 2.04, by an Officer of the Guarantor that meets the requirements of Sections 11.04 and 11.05.
“Opinion of Counsel” means a written opinion reasonably acceptable to the Trustee that meets the requirements of Sections 11.04 and
11.05. Such written opinion must be from legal counsel, and such counsel may be an employee of or counsel to the Company, the Guarantor or
an Affiliate of the Company or the Guarantor.
“Original Issue Discount Security” means any Security that provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 6.02.
“Permitted Liens” means:
(i) Liens existing on the date of first issuance of a series of Securities;
(ii) Liens on property or assets of, or any shares of stock of, or other equity interests in, or Debt of, any Person existing at the time such
Person becomes a Subsidiary or a Principal Domestic Subsidiary or at the time such Person is merged into or consolidated with the Company
or any Subsidiary or at the time of a sale, lease or other disposition of the properties of a Person (or a division thereof) as an entirety or
substantially as an entirety to the Company or a Subsidiary;
(iii) Liens on assets (including improvements and accessions thereto and proceeds thereof) (a) existing at the time of acquisition thereof,
(b) securing all or any portion of the cost of acquiring, constructing, improving, developing or expanding such assets or (c) securing Debt
incurred prior to, at the time of, or within 24 months after, the later of the acquisition, the completion of construction, improvement,
development or expansion or the commencement of commercial operation of such assets, for the purpose (in the case of this clause (c)) of
(x) financing all or any part of the purchase price of such assets or (y) financing all or any part of the cost of construction, improvement,
development or expansion of any such assets;
-4-
(iv) Liens in favor of the Company or any Subsidiary;
(v) Liens securing industrial development, pollution control or other revenue bonds issued or guaranteed by the United States of America,
or any State, or any department, agency, instrumentality or political subdivision of either;
(vi) Liens on personal property, other than shares of stock or Debt of any Principal Domestic Subsidiary, securing loans maturing not
more than one year from the date of the creation thereof;
(vii) statutory liens or landlords’, carriers’, warehouseman’s, mechanics’, suppliers’, materialmen’s, repairmen’s or other like Liens
arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate
proceedings; and
(viii) any extensions, substitutions, replacements or renewals in whole or in part of a Lien enumerated in clauses (i) through (vii) above or
any Debt secured by such a Lien; provided that (a) such new Lien shall be limited to all or part of the same property that secured the original
Lien, plus improvements on such property, and (b) the principal amount of Debt secured by such Lien and not otherwise authorized by clauses
(i) through (vii) above or otherwise permitted does not materially exceed the principal amount of Debt so secured plus any premium or fee
payable in connection with any such extension, substitution, replacement or renewal.
“Person” means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated
association, joint stock company, trust, unincorporated organization or government or other agency, instrumentality or political subdivision
thereof or other entity of any kind.
“Place of Payment” means, with respect to the Securities of any series, the place or places where the principal of, premium (if any) and
interest on and any Additional Amounts with respect to the Securities of that series are payable as specified in accordance with Section 2.01
subject to the provisions of Section 4.02.
“principal” of a Security means the principal of the Security plus, when appropriate, the premium, if any, on the Security.
“Principal Domestic Subsidiary” means the Guarantor and any Subsidiary (i) that has substantially all of its assets located in the United
States, (ii) that owns a Principal Property and (iii) in which the Company’s direct or indirect capital investment, together with the outstanding
balance of (a) any loans and advances made to such Subsidiary by the Company or any other Subsidiary and (b) any debt of such Subsidiary
guaranteed by the Company or any other Subsidiary, exceeds $100,000,000.
“Principal Property” means any refinery or manufacturing plant (excluding any transportation or marketing facilities or assets) located in
the United States, in each case owned
-5-
by the Company or a Subsidiary, except any refinery or plant that, in the opinion of the Board of Directors of the Company, is not of material
importance to the total business conducted by the Company and its consolidated subsidiaries.
“Redemption Date” means, with respect to any Security to be redeemed, the date fixed for such redemption by or pursuant to this
Indenture.
“Redemption Price” means, with respect to any Security to be redeemed, the price at which it is to be redeemed pursuant to this
Indenture.
“Responsible Officer” means any officer within the corporate trust department of the Trustee, including any vice president, assistant vice
president, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at
the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person’s knowledge of and
familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture.
“Rule 144A Securities” means Securities of a series designated pursuant to Section 2.01 as entitled to the benefits of Section 4.03(b).
“Sale/Leaseback Transaction” means any arrangement with any Person pursuant to which the Company or any Subsidiary leases any
Principal Property that has been or is to be sold or transferred by the Company or such Subsidiary to such Person, other than (1) temporary
leases for a term, including renewals at the option of the lessee, of not more than three years, (2) leases between the Company and a Subsidiary
or between Subsidiaries, (3) leases of Principal Property executed by the time of, or within 12 months after the latest of, the acquisition, the
completion of construction or improvement, or the commencement of commercial operation of the Principal Property, and (4) arrangements
pursuant to any provision of law with an effect similar to the former Section 168(f)(8) of the Internal Revenue Code of 1954.
“SEC” means the Securities and Exchange Commission.
“Securities” has the meaning stated in the preamble of this Indenture and more particularly means any Securities authenticated and
delivered under this Indenture.
“Security Custodian” means, with respect to Securities of a series issued in global form, the Trustee for Securities of such series, as
custodian with respect to the Securities of such series, or any successor entity thereto.
“Stated Maturity” means, when used with respect to any Security or any installment of principal thereof or interest thereon, the date
specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and
payable.
“Subsidiary” means a Person at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by the Company
or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, “voting stock”
means stock having voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting
power by reason of any contingency.
-6-
“TIA” means the Trust Indenture Act of 1939, as amended, as in effect on the date hereof.
“Trustee” means the Person named as such above until a successor replaces it in accordance with the applicable provisions of this
Indenture, and thereafter “Trustee” means each Person who is then a Trustee hereunder, and if at any time there is more than one such Person,
“Trustee” as used with respect to the Securities of any series means the Trustee with respect to Securities of that series.
“United States” means the United States of America (including the States and the District of Columbia) and its territories and possessions,
which include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands.
“U.S. Government Obligations” means Government Obligations with respect to Securities payable in Dollars.
SECTIO 1.02 Other Definitions.
N
DEFINED
IN SECTION
TERM
“Bankruptcy Custodian”
“Conversion Event”
“covenant defeasance”
“Event of Default”
“Exchange Rate”
“Judgment Currency”
“legal defeasance”
“mandatory sinking fund payment”
“optional sinking fund payment”
“Paying Agent”
“Registrar”
“Required Currency”
“Successor”
6.01
6.01
8.01
6.01
2.11
6.10
8.01
3.09
3.09
2.05
2.05
6.10
5.01
SECTIO 1.03 Incorporation by Reference of Trust Indenture Act.
N
Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture
(and if the Indenture is not qualified under the TIA at that time, as if it were so qualified unless otherwise provided). The following TIA terms
used in this Indenture have the following meanings:
“Commission” means the SEC.
“indenture securities” means the Securities.
-7-
“indenture security holder” means a Holder.
“indenture to be qualified” means this Indenture.
“indenture trustee” or “institutional trustee” means the Trustee.
“obligor” on the indenture securities means the Company, the Guarantor or any other obligor on the Securities.
All terms used in this Indenture that are defined by the TIA, defined by a TIA reference to another statute or defined by an SEC rule
under the TIA have the meanings so assigned to them.
SECTIO 1.04 Rules of Construction.
N
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP;
(3) “or” is not exclusive;
(4) words in the singular include the plural, and in the plural include the singular;
(5) provisions apply to successive events and transactions; and
(6) all references in this instrument to Articles and Sections are references to the corresponding Articles and Sections in and of this
instrument.
ARTICLE II
THE SECURITIES
SECTIO 2.01 Amount Unlimited; Issuable in Series.
N
The aggregate principal amount of Securities that may be authenticated and delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution of the Company, and
set forth, or determined in the manner provided, in an Officers’ Certificate of the Company or in a Company Order, or established in one or
more indentures supplemental hereto, prior to the issuance of Securities of any series:
(1) the title of the Securities of the series (which shall distinguish the Securities of the series from the Securities of all other series);
(2) if there is to be a limit, the limit upon the aggregate principal amount of the Securities of the series that may be authenticated and
delivered under this Indenture (except for
-8-
Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to
Section 2.08, 2.09, 2.12, 2.17, 3.07 or 9.05 and except for any Securities which, pursuant to Section 2.04 or 2.17, are deemed never to have
been authenticated and delivered hereunder); provided, however, that unless otherwise provided in the terms of the series, the authorized
aggregate principal amount of such series may be increased before or after the issuance of any Securities of the series by a Board Resolution (or
action pursuant to a Board Resolution) to such effect;
(3) whether any Securities of the series are to be issuable initially in temporary global form and whether any Securities of the series are to
be issuable in permanent global form, as Global Securities or otherwise, and, if so, whether beneficial owners of interests in any such Global
Security may exchange such interests for Securities of such series and of like tenor of any authorized form and denomination and the
circumstances under which any such exchanges may occur, if other than in the manner provided in Section 2.17, and the initial Depositary and
Security Custodian, if any, for any Global Security or Securities of such series;
(4) the manner in which any interest payable on a temporary Global Security on any Interest Payment Date will be paid if other than in
the manner provided in Section 2.14;
(5) the date or dates on which the principal of and premium (if any) on the Securities of the series is payable or the method of
determination thereof;
(6) the rate or rates, or the method of determination thereof, at which the Securities of the series shall bear interest, if any, whether and
under what circumstances Additional Amounts with respect to such Securities shall be payable, the date or dates from which such interest shall
accrue, the Interest Payment Dates on which such interest shall be payable and the record date for the interest payable on any Securities on any
Interest Payment Date, or if other than provided herein, the Person to whom any interest on Securities of the series shall be payable;
(7) the place or places where, subject to the provisions of Section 4.02, the principal of, premium (if any) and interest on and any
Additional Amounts with respect to the Securities of the series shall be payable;
(8) the period or periods within which, the price or prices (whether denominated in cash, securities or otherwise) at which and the terms
and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company, if the Company is to
have that option, and the manner in which the Company must exercise any such option, if different from those set forth herein;
(9) the period or periods within which, the price or prices (whether denominated in cash, securities or otherwise) at which and the terms
and conditions upon which Securities of the series are required to be redeemed by the Company, in whole or in part, and the manner in which
the Company must redeem such Securities;
(10) the obligation, if any, of the Company to redeem, purchase or repay Securities of the series pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices (whether denominated in
cash, securities or otherwise) at which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid
in whole or in part pursuant to such obligation;
-9-
(11) if other than denominations of $2,000 and any integral multiple of $1,000 in excess thereof, the denomination in which any
Securities of that series shall be issuable;
(12) if other than Dollars, the currency or currencies (including composite currencies) or the form, including equity securities, other debt
securities (including Securities), warrants or any other securities or property of the Company, the Guarantor or any other Person, in which
payment of the principal of, premium (if any) and interest on and any Additional Amounts with respect to the Securities of the series shall be
payable;
(13) if the principal of, premium (if any) or interest on or any Additional Amounts with respect to the Securities of the series are to be
payable, at the election of the Company or a Holder thereof, in a currency or currencies (including composite currencies) other than that in
which the Securities are stated to be payable, the currency or currencies (including composite currencies) in which payment of the principal of,
premium (if any) and interest on and any Additional Amounts with respect to Securities of such series as to which such election is made shall
be payable, and the periods within which and the terms and conditions upon which such election is to be made;
(14) if the amount of payments of principal of, premium (if any) and interest on and any Additional Amounts with respect to the
Securities of the series may be determined with reference to any commodities, currencies or indices, values, rates or prices or any other index
or formula, the manner in which such amounts shall be determined;
(15) if other than the entire principal amount thereof, the portion of the principal amount of Securities of the series that shall be payable
upon declaration of acceleration of the Maturity thereof pursuant to Section 6.02;
(16) any additional means of satisfaction and discharge of this Indenture and any additional conditions or limitations to discharge with
respect to Securities of the series and the related Guarantees pursuant to Article VIII or any modifications of or deletions from such conditions
or limitations;
(17) any deletions or modifications of or additions to the Events of Default set forth in Section 6.01 or covenants of the Company or the
Guarantor set forth in Article IV pertaining to the Securities of the series;
(18) any restrictions or other provisions with respect to the transfer or exchange of Securities of the series, which may amend,
supplement, modify or supersede those contained in this Article II;
(19) if the Securities of the series are to be convertible into or exchangeable for capital stock, other debt securities (including Securities),
warrants, other equity securities or any other securities or property of the Company, the Guarantor or any other Person, at the option of the
Company or the Holder or upon the occurrence of any condition or event, the terms and conditions for such conversion or exchange;
-10-
(20) whether the Securities of the series are to be entitled to the benefit of Section 4.03(b) (and accordingly constitute Rule 144A
Securities); and
(21) any other terms of the series (which terms shall not be prohibited by the provisions of this Indenture).
All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or
pursuant to the Board Resolution referred to above and (subject to Section 2.03) set forth, or determined in the manner provided, in the
Officers’ Certificate or Company Order referred to above or in any such indenture supplemental hereto.
If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such
action, together with such Board Resolution, shall be set forth in an Officers’ Certificate or certified by the Secretary or an Assistant Secretary
of the Company and delivered to the Trustee at or prior to the delivery of the Officers’ Certificate or Company Order setting forth the terms of
the series.
SECTIO 2.02 Denominations.
N
The Securities of each series shall be issuable in such denominations as shall be specified as contemplated by Section 2.01. In the absence
of any such provisions with respect to the Securities of any series, the Securities of such series denominated in Dollars shall be issuable in
denominations of $2,000 and any integral multiple of $1,000 in excess thereof.
SECTIO 2.03 Forms Generally.
N
The Securities of each series shall be in fully registered form and in substantially such form or forms (including temporary or permanent
global form) established by or pursuant to a Board Resolution of the Company or in one or more indentures supplemental hereto. The
Securities may have notations, legends or endorsements required by law, securities exchange rule, the Company’s certificate of incorporation,
bylaws or other similar governing documents, agreements to which the Company is subject, if any, or usage (provided that any such notation,
legend or endorsement is in a form acceptable to the Company). A copy of the Board Resolution establishing the form or forms of Securities of
any series shall be delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 2.04 for the authentication
and delivery of such Securities.
The definitive Securities of each series shall be printed, lithographed or engraved on steel engraved borders or may be produced in any
other manner, all as determined by the Officers executing such Securities, as evidenced by their execution thereof.
-11-
The Trustee’s certificate of authentication shall be in substantially the following form:
“This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
THE BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., as Trustee
By:
Authorized Signatory”.
SECTIO 2.04 Execution, Authentication, Delivery and Dating.
N
Two Officers of the Company shall sign the Securities on behalf of the Company and, with respect to the Guarantees of the Securities, an
Officer of the Guarantor shall sign the Securities on behalf of the Guarantor, in each case by manual or facsimile signature.
If an Officer of the Company or the Guarantor whose signature is on a Security no longer holds that office at the time the Security is
authenticated, the Security shall be valid nevertheless.
A Security shall not be entitled to any benefit under this Indenture or the related Guarantees or be valid or obligatory for any purpose
until authenticated by the manual signature of an authorized signatory of the Trustee, which signature shall be conclusive evidence that the
Security has been authenticated under this Indenture. Notwithstanding the foregoing, if any Security has been authenticated and delivered
hereunder but never issued and sold by the Company, and the Company delivers such Security to the Trustee for cancellation as provided in
Section 2.13, together with an Officers’ Certificate (which need not comply with Section 11.05 and need not be accompanied by an Opinion of
Counsel) stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be
deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture or the related
Guarantee.
At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series
executed by the Company and the Guarantor to the Trustee for authentication, and the Trustee shall authenticate and deliver such Securities for
original issue upon a Company Order for the authentication and delivery of such Securities or pursuant to such procedures acceptable to the
Trustee as may be specified from time to time by Company Order. Such order shall specify the amount of the Securities to be authenticated, the
date on which the original issue of Securities is to be authenticated, the name or names of the initial Holder or Holders and any other terms of
the Securities of such series not otherwise determined. If provided for in such procedures, such Company Order may authorize
(1) authentication and delivery of Securities of such series for original issue from time to time, with certain terms (including, without limitation,
the Maturity dates or dates, original issue date or dates and interest rate or rates) that differ from Security to Security and (2) may authorize
authentication and delivery pursuant to oral or electronic instructions from the Company or its duly authorized agent, which instructions shall
be promptly confirmed in writing.
In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the
Trustee shall be entitled to receive (in addition to the
-12-
Company Order referred to above and the other documents required by Section 11.04), and (subject to Section 7.01) shall be fully protected in
relying upon:
(a) a copy of the Board Resolutions pursuant to which the terms and form of the Securities were established, certified by the Secretary or
an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect as of the date of
such certificate, and if the terms and form of such Securities are established by an Officers’ Certificate pursuant to general authorization of the
Board of Directors, such Officers’ Certificate;
(b) an executed supplemental indenture, if any;
(c) an Officers’ Certificate delivered in accordance with Sections 11.04 and 11.05; and
(d) an Opinion of Counsel to the effect that:
(i) the form of such Securities has been established in conformity with the provisions of this Indenture;
(ii) the terms of such Securities have been established in conformity with the provisions of this Indenture;
(iii) when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions
specified in such Opinion of Counsel, such Securities and the related Guarantees will constitute valid and binding obligations of the
Company and the Guarantor, respectively, enforceable against the Company and the Guarantor, respectively, in accordance with their
respective terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws in effect from time to time affecting the rights of creditors generally, and the application of
general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and
(iv) all conditions precedent to the authentication and delivery of the Securities and, if applicable, the execution of the supplemental
indenture, have been complied with.
If all the Securities of any series are not to be issued at one time, it shall not be necessary to deliver an Officers’ Certificate and Opinion
of Counsel at the time of issuance of each such Security, but such Officers’ Certificate and Opinion of Counsel shall be delivered at or before
the time of issuance of the first Security of the series to be issued.
The Trustee shall not be required to authenticate such Securities if the issuance of such Securities pursuant to this Indenture would affect
the Trustee’s own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner not reasonably acceptable to the
Trustee.
-13-
The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. Unless limited by the terms of
such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the
Company, the Guarantor or an Affiliate of the Company or the Guarantor.
Each Security shall be dated the date of its authentication.
SECTIO 2.05 Registrar and Paying Agent.
N
The Company shall maintain an office or agency for each series of Securities where Securities of such series may be presented for
registration of transfer or exchange (“Registrar”) and an office or agency where Securities of such series may be presented for payment
(“Paying Agent”). The Registrar shall keep a register of the Securities of such series and of their transfer and exchange. The Company may
appoint one or more co-registrars and one or more additional paying agents. The term “Registrar” includes any co-registrar and the term
“Paying Agent” includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with any Registrar or Paying Agent not a party to this Indenture. The
agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and
address of any Agent not a party to this Indenture. The Company may change any Paying Agent or Registrar without notice to any Holder. If
the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company, the
Guarantor or any Subsidiary may act as Paying Agent or Registrar.
The Company initially appoints the Trustee as Registrar and Paying Agent.
SECTIO 2.06 Paying Agent to Hold Money in Trust.
N
The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, or interest on or any
Additional Amounts with respect to Securities and will notify the Trustee of any default by the Company in making any such payment. While
any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds
disbursed. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds
disbursed. Upon payment over to the Trustee and upon accounting for any funds disbursed, the Paying Agent (if other than the Company, the
Guarantor or a Subsidiary) shall have no further liability for the money. If the Company, the Guarantor or a Subsidiary acts as Paying Agent, it
shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Each Paying Agent shall
otherwise comply with TIA Section 317(b).
-14-
SECTIO 2.07 Holder Lists.
N
The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses
of Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar with respect to a series of Securities, the
Company shall furnish to the Trustee at least five Business Days before each Interest Payment Date with respect to such series of Securities,
and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of
the names and addresses of Holders of such series, and the Company shall otherwise comply with TIA Section 312(a).
SECTIO 2.08 Transfer and Exchange.
N
Except as set forth in Section 2.17 or as may be provided pursuant to Section 2.01:
When Securities of any series are presented to the Registrar with the request to register the transfer of such Securities or to exchange such
Securities for an equal principal amount of Securities of the same series of like tenor and of other authorized denominations, the Registrar shall
register the transfer or make the exchange as requested if its requirements and the requirements of this Indenture for such transactions are met;
provided, however, that the Securities presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied
by a written instruction of transfer in form reasonably satisfactory to the Registrar duly executed by the Holder thereof or by his attorney, duly
authorized in writing, on which instruction the Registrar can rely.
To permit registrations of transfers and exchanges, the Company and the Guarantor shall execute and the Trustee shall authenticate
Securities at the Registrar’s written request and submission of the Securities or Global Securities. No service charge shall be made to a Holder
for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar
governmental charge payable upon exchanges pursuant to Section 2.12, 3.07 or 9.05). The Trustee shall authenticate Securities in accordance
with the provisions of Section 2.04. Notwithstanding any other provisions of this Indenture to the contrary, the Company shall not be required
to register the transfer or exchange of (a) any Security selected for redemption in whole or in part pursuant to Article III, except the
unredeemed portion of any Security being redeemed in part, or (b) any Security during the period beginning 15 Business Days prior to the
mailing of notice of any offer to repurchase Securities of the series required pursuant to the terms thereof or of redemption of Securities of a
series to be redeemed and ending at the close of business on the day of mailing.
The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed
under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or
among Agent Members (as defined below) or beneficial owners of interests in any Global Security) other than to require delivery of such
certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this
Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof.
-15-
SECTIO 2.09 Replacement Securities.
N
If any mutilated Security is surrendered to the Trustee, or if the Holder of a Security claims that the Security has been destroyed, lost or
stolen and the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of such Security, the Company
shall issue, the Guarantor shall execute and the Trustee shall authenticate a replacement Security of the same series if the Trustee’s
requirements are met. If any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company
in its discretion may, instead of issuing a new Security, pay such Security. If required by the Trustee, the Guarantor or the Company, such
Holder must furnish an indemnity bond that is sufficient in the judgment of the Trustee and the Company to protect the Company, the
Guarantor, the Trustee, any Agent or any authenticating agent from any loss that any of them may suffer if a Security is replaced. The
Company and the Trustee may charge a Holder for their expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company.
SECTIO 2.10 Outstanding Securities.
N
The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those canceled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Security effected by the Trustee hereunder and those described in this
Section 2.10 as not outstanding.
If a Security is replaced pursuant to Section 2.09, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the principal amount of any Security is considered paid under Section 4.01, it ceases to be outstanding and interest on it ceases to
accrue.
A Security does not cease to be outstanding because the Company, the Guarantor or an Affiliate of the Company or the Guarantor holds
the Security.
SECTIO 2.11 Original Issue Discount, Foreign-Currency Denominated and Treasury Securities.
N
In determining whether the Holders of the required principal amount of Securities have concurred in any direction, amendment,
supplement, waiver or consent, (a) the principal amount of an Original Issue Discount Security shall be the principal amount thereof that would
be due and payable as of the date of such determination upon acceleration of the Maturity thereof pursuant to Section 6.02, (b) the principal
amount of a Security denominated in a foreign currency shall be the Dollar equivalent, as determined by the Company by reference to the noon
buying rate in The City of New York for cable transfers for such currency, as such rate is certified for customs purposes by the Federal Reserve
Bank of New York (the “Exchange Rate”)
-16-
on the date of original issuance of such Security, of the principal amount (or, in the case of an Original Issue Discount Security, the Dollar
equivalent, as determined by the Company by reference to the Exchange Rate on the date of original issuance of such Security, of the amount
determined as provided in (a) above), of such Security and (c) Securities owned by the Company, the Guarantor or any other obligor upon the
Securities or any Affiliate of the Company, of the Guarantor or of such other obligor shall be disregarded, except that, for the purpose of
determining whether the Trustee shall be protected in relying upon any such direction, amendment, supplement, waiver or consent, only
Securities that a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded.
SECTIO 2.12 Temporary Securities.
N
Until definitive Securities of any series are ready for delivery, the Company may prepare, the Company and the Guarantor shall execute
and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities, but may
have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare, the
Company and the Guarantor shall execute and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Until so
exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities.
SECTIO 2.13 Cancellation.
N
The Company or the Guarantor at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange, payment or redemption or for credit
against any sinking fund payment. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange, payment,
redemption, replacement or cancellation or for credit against any sinking fund. Unless the Company shall direct in writing that canceled
Securities be returned to it, after written notice to the Company all canceled Securities held by the Trustee shall be disposed of in accordance
with the usual disposal procedures of the Trustee, and the Trustee shall maintain a record of their disposal. The Company may not issue new
Securities to replace Securities that have been paid or that have been delivered to the Trustee for cancellation.
SECTIO 2.14 Payments; Defaulted Interest.
N
Unless otherwise provided as contemplated by Section 2.01, interest (except defaulted interest) on any Security that is payable, and is
punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Persons who are registered Holders of that Security at
the close of business on the record date next preceding such Interest Payment Date, even if such Securities are canceled after such record date
and on or before such Interest Payment Date. The Holder must surrender a Security to a Paying Agent to collect principal payments. Unless
otherwise provided with respect to the Securities of any series, the Company will pay the principal of, premium (if any) and interest on and any
Additional Amounts with respect to the Securities in Dollars. Such amounts shall be payable at the offices of the Trustee or any Paying Agent,
provided that at the option of the Company, the Company may pay such amounts (1) by wire transfer with respect to Global Securities or (2) by
wire transfer or check payable in such money mailed to a Holder’s registered address with respect to any Securities.
-17-
If the Company defaults in a payment of interest on the Securities of any series, the Company shall pay the defaulted interest in any
lawful manner plus, to the extent lawful, interest on the defaulted interest, in each case at the rate provided in the Securities of such series and
in Section 4.01. The Company may pay the defaulted interest to the Persons who are Holders on a subsequent special record date. At least 15
days before any special record date selected by the Company, the Company (or the Trustee, in the name of and at the expense of the Company
upon 20 days’ prior written notice from the Company setting forth such special record date and the interest amount to be paid) shall mail to
Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid.
SECTIO 2.15 Persons Deemed Owners.
N
The Company, the Guarantor, the Trustee, any Agent and any authenticating agent may treat the Person in whose name any Security is
registered as the owner of such Security for the purpose of receiving payments of principal of, premium (if any) or interest on or any Additional
Amounts with respect to such Security and for all other purposes. None of the Company, the Guarantor, the Trustee, any Agent or any
authenticating agent shall be affected by any notice to the contrary.
SECTIO 2.16 Computation of Interest.
N
Except as otherwise specified as contemplated by Section 2.01 for Securities of any series, interest on the Securities of each series shall
be computed on the basis of a year comprising twelve 30-day months.
SECTIO 2.17 Global Securities; Book-Entry Provisions.
N
If Securities of a series are issuable in global form as a Global Security, as contemplated by Section 2.01, then, notwithstanding clause
(11) of Section 2.01 and the provisions of Section 2.02, any such Global Security shall represent such of the outstanding Securities of such
series as shall be specified therein and may provide that it shall represent the aggregate amount of outstanding Securities from time to time
endorsed thereon and that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased,
as appropriate, to reflect exchanges, transfers or redemptions. Any endorsement of a Global Security to reflect the amount, or any increase or
decrease in the amount, of outstanding Securities represented thereby shall be made by the Trustee (i) in such manner and upon instructions
given by such Person or Persons as shall be specified in such Security or in a Company Order to be delivered to the Trustee pursuant to
Section 2.04 or (ii) otherwise in accordance with written instructions or such other written form of instructions as is customary for the
Depositary for such Security, from such Depositary or its nominee on behalf of any Person having a beneficial interest in such Global Security.
Subject to the provisions of Section 2.04 and, if applicable, Section 2.12, the Trustee shall deliver and redeliver any Security in permanent
global form in the manner and upon instructions given by the Person or Persons specified in such Security or in the applicable Company Order.
With respect to the Securities of
-18-
any series that are represented by a Global Security, the Company and the Guarantor authorize the execution and delivery by the Trustee of a
letter of representations or other similar agreement or instrument in the form customarily provided for by the Depositary appointed with respect
to such Global Security. Any Global Security may be deposited with the Depositary or its nominee, or may remain in the custody of the Trustee
or the Security Custodian therefor pursuant to a FAST Balance Certificate Agreement or similar agreement between the Trustee and the
Depositary. If a Company Order has been, or simultaneously is, delivered, any instructions by the Company with respect to endorsement or
delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 11.05 and need not be accompanied by
an Opinion of Counsel.
Members of, or participants in, the Depositary (“Agent Members”) shall have no rights under this Indenture with respect to any Global
Security held on their behalf by the Depositary, or the Trustee or the Security Custodian as its custodian, or under such Global Security, and the
Depositary may be treated by the Company, the Guarantor, the Trustee or the Security Custodian and any agent of the Company, the Guarantor,
the Trustee or the Security Custodian as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the
foregoing, (i) the registered holder of a Global Security of a series may grant proxies and otherwise authorize any Person, including Agent
Members and Persons that may hold interests through Agent Members, to take any action that a Holder of Securities of such series is entitled to
take under this Indenture or the Securities of such series and (ii) nothing herein shall prevent the Company, the Guarantor, the Trustee or the
Security Custodian, or any agent of the Company, the Guarantor, the Trustee or the Security Custodian, from giving effect to any written
certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the
operation of customary practices governing the exercise of the rights of a beneficial owner of any Security.
Notwithstanding Section 2.08, and except as otherwise provided pursuant to Section 2.01: Transfers of a Global Security shall be limited
to transfers of such Global Security in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of
beneficial owners in a Global Security may be transferred in accordance with the rules and procedures of the Depositary. Securities shall be
transferred to all beneficial owners in exchange for their beneficial interests in a Global Security if, and only if, either (1) the Depositary
notifies the Company that it is unwilling or unable to continue as Depositary for the Global Security and a successor Depositary is not
appointed by the Company within 90 days of such notice, (2) an Event of Default has occurred with respect to such series and is continuing and
the Registrar has received a request from the Depositary to issue Securities in lieu of all or a portion of the Global Security (in which case the
Company shall deliver Securities within 30 days of such request) or (3) the Company determines not to have the Securities represented by a
Global Security.
In connection with any transfer of a portion of the beneficial interests in a Global Security to beneficial owners pursuant to this
Section 2.17, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Global Security in an
amount equal to the principal amount of the beneficial interests in the Global Security to be transferred, and the Company and the Guarantor
shall execute, and the Trustee upon receipt of a Company Order for the authentication and delivery of Securities shall authenticate and deliver,
one or more Securities of the same series of like tenor and amount.
-19-
In connection with the transfer of all the beneficial interests in a Global Security to beneficial owners pursuant to this Section 2.17, the
Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company and the Guarantor shall execute, and the
Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interests in the Global
Security, an equal aggregate principal amount of Securities of authorized denominations.
Neither the Company, the Guarantor nor the Trustee will have any responsibility or liability for any aspect of the records relating to, or
payments made on account of, Securities by the Depositary, or for maintaining, supervising or reviewing any records of the Depositary relating
to such Securities. Neither the Company, the Guarantor nor the Trustee shall be liable for any delay by the related Global Security Holder or
the Depositary in identifying the beneficial owners, and each such Person may conclusively rely on, and shall be protected in relying on,
instructions from such Global Security Holder or the Depositary for all purposes (including with respect to the registration and delivery, and the
respective principal amounts, of the Securities to be issued).
The provisions of the last sentence of the third paragraph of Section 2.04 shall apply to any Global Security if such Global Security was
never issued and sold by the Company and the Company or the Guarantor delivers to the Trustee the Global Security together with an Officers’
Certificate (which need not comply with Section 11.05 and need not be accompanied by an Opinion of Counsel) with regard to the cancellation
or reduction in the principal amount of Securities represented thereby, together with the written statement contemplated by the last sentence of
the third paragraph of Section 2.04.
Notwithstanding the provisions of Sections 2.03 and 2.14, unless otherwise specified as contemplated by Section 2.01, payment of
principal of, premium (if any) and interest on and any Additional Amounts with respect to any Global Security shall be made to the Person or
Persons specified therein.
Neither the Trustee nor any Agent shall have any responsibility for any actions taken or not taken by the Depositary.
SECTIO 2.18 CUSIP Numbers.
N
The Company in issuing the Securities may use “CUSIP” numbers (if then generally in use), and, if so, the Trustee shall use “CUSIP”
numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed
only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission
of such numbers. The Company will promptly notify the Trustee in writing of any change in the “CUSIP” numbers of the Securities.
-20-
ARTICLE III
REDEMPTION
SECTIO 3.01 Applicability of Article.
N
Securities of any series that are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as
otherwise specified as contemplated by Section 2.01 for Securities of any series) in accordance with this Article III.
SECTIO 3.02 Notice to the Trustee.
N
If the Company elects to redeem Securities of any series pursuant to this Indenture, it shall notify the Trustee of the Redemption Date and
the principal amount of Securities of such series to be redeemed. The Company shall so notify the Trustee at least 45 days before the
Redemption Date (unless a shorter notice shall be satisfactory to the Trustee) by delivering to the Trustee an Officers’ Certificate stating that
such redemption will comply with the provisions of this Indenture and of the Securities of such series. Any such notice may be canceled at any
time prior to the mailing of such notice of such redemption to any Holder and shall thereupon be void and of no effect.
SECTIO 3.03 Selection of Securities To Be Redeemed.
N
If less than all the Securities of any series are to be redeemed (unless all of the Securities of such series of a specified tenor are to be
redeemed), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee from
the outstanding Securities of such series (and tenor) not previously called for redemption, either by lot or by such other method as determined
by applicable Depositary procedures and that may provide for the selection for redemption of portions (equal to the minimum authorized
denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a
denomination larger than the minimum authorized denomination for Securities of that series or of the principal amount of Global Securities of
such series.
The Trustee shall promptly notify the Company and the Registrar in writing of the Securities selected for redemption and, in the case of
any Securities selected for partial redemption, the principal amount thereof to be redeemed.
For purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the
case of any of the Securities redeemed or to be redeemed only in part, to the portion of the principal amount thereof which has been or is to be
redeemed.
SECTIO 3.04 Notice of Redemption.
N
Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the
Redemption Date (except in the case of any series of Securities initially issued on or prior to March 31, 2012, in which case notice of any
mandatory redemption may be given not less than 5 Business Days prior to the mandatory redemption date
-21-
as set forth in the Officers’ Certificate, Company Order or indenture supplemental hereto establishing the terms of such series of Securities), to
each Holder of Securities to be redeemed, at the address of such Holder appearing in the register of Securities maintained by the Registrar.
All notices of redemption shall identify the Securities to be redeemed and shall state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) that, unless the Company and the Guarantor default in making the redemption payment, interest on Securities called for redemption
ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Securities is to receive payment of the
Redemption Price upon surrender to the Paying Agent of the Securities redeemed;
(4) if any Security is to be redeemed in part, the portion of the principal amount thereof to be redeemed and that on and after the
Redemption Date, upon surrender for cancellation of such Security to the Paying Agent, a new Security or Securities in the aggregate principal
amount equal to the unredeemed portion thereof will be issued without charge to the Holder;
(5) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price and the name and
address of the Paying Agent;
(6) that the redemption is for a sinking or analogous fund, if such is the case; and
(7) the CUSIP number, if any, relating to such Securities, along with the statement in Section 2.18.
Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company’s
written request, by the Trustee in the name and at the expense of the Company.
SECTIO 3.05 Effect of Notice of Redemption.
N
Once notice of redemption is mailed, Securities called for redemption become due and payable on the Redemption Date and at the
Redemption Price. Upon surrender to the Paying Agent, such Securities called for redemption shall be paid at the Redemption Price, but
interest installments whose maturity is on or prior to such Redemption Date will be payable on the relevant Interest Payment Dates to the
Holders of record at the close of business on the relevant record dates specified pursuant to Section 2.01.
SECTIO 3.06 Deposit of Redemption Price.
N
On or prior to 11:00 a.m., New York City time, on any Redemption Date, the Company or the Guarantor shall deposit with the Trustee or
the Paying Agent (or, if the Company or the Guarantor is acting as the Paying Agent, segregate and hold in trust as provided in Section 2.06)
-22-
an amount of money in same day funds sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest
Payment Date) accrued interest on and any Additional Amounts with respect to, the Securities or portions thereof which are to be redeemed on
that date, other than Securities or portions thereof called for redemption on that date which have been delivered by the Company or the
Guarantor to the Trustee for cancellation.
If the Company or the Guarantor complies with the preceding paragraph, then, unless the Company and the Guarantor default in the
payment of such Redemption Price, interest on the Securities to be redeemed will cease to accrue on and after the applicable Redemption Date,
whether or not such Securities are presented for payment, and the Holders of such Securities shall have no further rights with respect to such
Securities except for the right to receive the Redemption Price upon surrender of such Securities. If any Security called for redemption shall not
be so paid upon surrender thereof for redemption, the principal, premium, if any, any Additional Amounts, and, to the extent lawful, accrued
interest thereon shall, until paid, bear interest from the Redemption Date at the rate specified pursuant to Section 2.01 or provided in the
Securities or, in the case of Original Issue Discount Securities, such Securities’ yield to maturity.
SECTIO 3.07 Securities Redeemed or Purchased in Part.
N
Upon surrender to the Paying Agent of a Security to be redeemed in part, the Company and the Guarantor shall execute and the Trustee
shall authenticate and deliver to the Holder of such Security without service charge to such Holder, upon delivery of a Company Order and an
Officers’ Certificate and Opinion of Counsel pursuant to Sections 11.04 and 11.05, a new Security or Securities, of the same series and of any
authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of
the principal of the Security so surrendered that is not redeemed.
SECTIO 3.08 Purchase of Securities.
N
Unless otherwise specified as contemplated by Section 2.01, the Company, the Guarantor and any Affiliate of the Company or the
Guarantor may, subject to applicable law, at any time purchase or otherwise acquire Securities in the open market or by private agreement. Any
such acquisition shall not operate as or be deemed for any purpose to be a redemption of the indebtedness represented by such Securities. Any
Securities purchased or acquired by the Company or the Guarantor may be delivered to the Trustee and, upon such delivery, the indebtedness
represented thereby shall be deemed to be satisfied. Section 2.13 shall apply to all Securities so delivered.
SECTIO 3.09 Mandatory and Optional Sinking Funds.
N
The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a
“mandatory sinking fund payment,” and any payment in excess of such minimum amount provided for by the terms of Securities of any series
is herein referred to as an “optional sinking fund payment.” Unless otherwise provided by the terms of Securities of any series, the cash amount
of any sinking fund payment may be subject to reduction as provided in Section 3.10. Each sinking fund payment shall be applied to the
redemption of Securities of any series as provided for by the terms of Securities of such series and by this Article III.
-23-
SECTIO 3.10 Satisfaction of Sinking Fund Payments with Securities.
N
The Company or the Guarantor may deliver outstanding Securities of a series (other than any previously called for redemption) and may
apply as a credit Securities of a series that have been redeemed either at the election of the Company pursuant to the terms of such Securities or
through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all
or any part of any sinking fund payment with respect to the Securities of such series required to be made pursuant to the terms of such series of
Securities; provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose
by the Trustee at the Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of
such sinking fund payment shall be reduced accordingly.
SECTIO 3.11 Redemption of Securities for Sinking Fund.
N
Not less than 45 days prior (unless a shorter period shall be satisfactory to the Trustee) to each sinking fund payment date for any series
of Securities, the Company will deliver to the Trustee an Officers’ Certificate of the Company specifying the amount of the next ensuing
sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash
and the portion thereof, if any, which is to be satisfied by delivery of or by crediting Securities of that series pursuant to Section 3.10 and will
also deliver or cause to be delivered to the Trustee any Securities to be so delivered. Failure of the Company to timely deliver or cause to be
delivered such Officers’ Certificate and Securities specified in this paragraph, if any, shall not constitute a default but shall constitute the
election of the Company that the mandatory sinking fund payment for such series due on the next succeeding sinking fund payment date shall
be paid entirely in cash without the option to deliver or credit Securities of such series in respect thereof and that the Company will make no
optional sinking fund payment with respect to such series as provided in this Section 3.11.
If the sinking fund payment or payments (mandatory or optional or both) to be made in cash on the next succeeding sinking fund payment
date plus any unused balance of any preceding sinking fund payments made in cash shall exceed $100,000 (or the Dollar equivalent thereof
based on the applicable Exchange Rate on the date of original issue of the applicable Securities) or a lesser sum if the Company shall so request
with respect to the Securities of any particular series, such cash shall be applied on the next succeeding sinking fund payment date to the
redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. If
such amount shall be $100,000 (or the Dollar equivalent thereof as aforesaid) or less and the Company makes no such request then it shall be
carried over until a sum in excess of $100,000 (or the Dollar equivalent thereof as aforesaid) is available. Not less than 30 days before each
such sinking fund payment date, the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner
specified in Section 3.03 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the
manner provided in Section 3.04. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in
the manner stated in Sections 3.05, 3.06 and 3.07.
-24-
ARTICLE IV
COVENANTS SECTION
SECTIO 4.01 Payment of Securities.
N
The Company shall pay the principal of, premium (if any) and interest on and any Additional Amounts with respect to the Securities of
each series on the dates and in the manner provided in the Securities of such series and in this Indenture. Principal, premium, interest and any
Additional Amounts shall be considered paid on the date due if the Paying Agent (other than the Company, the Guarantor or a Subsidiary)
holds on that date money deposited by the Company or the Guarantor designated for and sufficient to pay all principal, premium, interest and
any Additional Amounts then due.
The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and
premium (if any), at a rate equal to the then applicable interest rate on the Securities to the extent lawful; and it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and any Additional Amounts (without
regard to any applicable grace period) at the same rate to the extent lawful.
SECTIO 4.02 Maintenance of Office or Agency.
N
The Company will maintain in each Place of Payment for any series of Securities an office or agency (which may be an office of the
Trustee, the Registrar or the Paying Agent) where Securities of that series may be presented for registration of transfer or exchange, where
Securities of that series may be presented for payment and where notices and demands to or upon the Company or the Guarantor in respect of
the Securities of that series and this Indenture may be served. Unless otherwise designated by the Company by written notice to the Trustee and
the Guarantor, such office or agency shall be the office of the Trustee in The City of New York, which on the date hereof is located at 101
Barclay Street, 8 West, New York, New York 10286. The Company will give prompt written notice to the Trustee and the Guarantor of the
location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or
agency or shall fail to furnish the Trustee and the Guarantor with the address thereof, such presentations, surrenders, notices and demands may
be made or served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may
be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such
designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment
for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.
-25-
SECTIO 4.03 SEC Reports; Financial Statements.
N
(a) If the Company or the Guarantor is subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company or the
Guarantor, as the case may be, shall file with the Trustee, within 15 days after it files the same with the SEC, copies of the annual and quarterly
reports and the information, documents and other reports (or such portions of any of the foregoing as the SEC may by rules and regulations
prescribe) that the Company or the Guarantor is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If this
Indenture is qualified under the TIA, but not otherwise, the Company and the Guarantor shall also comply with the provisions of TIA
Section 314(a). Delivery of such reports, information and documents to the Trustee shall be for informational purposes only, and the Trustee’s
receipt thereof shall not constitute constructive notice of any information contained therein or determinable from information contained therein,
including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers’
Certificates or certificates delivered pursuant to Section 4.04).
(b) If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company shall furnish to all
Holders of Rule 144A Securities and prospective purchasers of Rule 144A Securities designated by the Holders of Rule 144A Securities,
promptly upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) promulgated under the Securities Act of
1933, as amended.
SECTIO 4.04 Compliance Certificate.
N
(a) Each of the Company and the Guarantor shall deliver to the Trustee, within 120 days after the end of each fiscal year, a statement
signed by an Officer of the Company or the Guarantor, as the case may be, which need not constitute an Officers’ Certificate, complying with
TIA Section 314(a)(4) and stating that in the course of performance by the signing Officer of his duties as such Officer of the Company or the
Guarantor, as the case may be, he would normally obtain knowledge of the keeping, observing, performing and fulfilling by the Company or
the Guarantor, as the case may be, of its obligations under this Indenture, and further stating that to the best of his knowledge the Company or
the Guarantor, as the case may be, has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in
default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have
occurred, describing all such Defaults or Events of Default of which such Officer may have knowledge and what action the Company or the
Guarantor, as the case may be, is taking or proposes to take with respect thereto).
(b) The Company or the Guarantor shall, so long as Securities of any series are outstanding, deliver to the Trustee, forthwith upon any
Officer of the Company or the Guarantor, as the case may be, becoming aware of any Default or Event of Default under this Indenture, an
Officers’ Certificate specifying such Default or Event of Default and what action the Company or the Guarantor, as the case may be, is taking
or proposes to take with respect thereto.
-26-
SECTIO 4.05 Corporate Existence.
N
Subject to Article V, each of the Company and the Guarantor shall do or cause to be done all things necessary to preserve and keep in full
force and effect its existence.
SECTIO 4.06 Waiver of Stay, Extension or Usury Laws.
N
Each of the Company and the Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that
would prohibit or forgive it from paying all or any portion of the principal of or interest on the Securities as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it
may lawfully do so) each of the Company and the Guarantor hereby expressly waives all benefit or advantage of any such law, and covenants
that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
SECTIO 4.07 Additional Amounts.
N
If the Securities of a series expressly provide for the payment of Additional Amounts, the Company will pay to the Holder of any
Security of such series Additional Amounts as expressly provided therein.
Whenever in this Indenture there is mentioned, in any context, the payment of the principal of or any premium or interest on, or in respect
of, any Security of any series or the net proceeds received from the sale or exchange of any Security of any series, such mention shall be
deemed to include mention of the payment of Additional Amounts provided for in this Section 4.07 to the extent that, in such context,
Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section 4.07 and express mention of the
payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those
provisions hereof where such express mention is not made.
SECTIO 4.08 Limitation on Liens.
N
The Company shall not, and shall not permit any Principal Domestic Subsidiary to, issue, assume or guarantee any Debt for borrowed
money secured by any Lien upon any Principal Property or any shares of stock or Debt of any Principal Domestic Subsidiary (whether such
Principal Property, shares of stock or Debt is now owned or hereafter acquired) without making effective provision whereby the Securities
(together with, if the Company shall so determine, any other Debt or other obligation of the Company or any Subsidiary) shall be secured
equally and ratably with (or, at the option of the Company, prior to) the Debt so secured for so long as such Debt is so secured. The foregoing
restrictions will not, however, apply to Debt secured by Permitted Liens.
In addition, the Company and its Principal Domestic Subsidiaries may, without securing the Securities, issue, assume or guarantee Debt
that would otherwise be subject to the foregoing
-27-
restrictions in an aggregate principal amount that, together with all other such Debt of the Company and its Principal Domestic Subsidiaries
that would otherwise be subject to the foregoing restrictions (not including Debt permitted to be secured under the definition of Permitted
Liens) and the aggregate amount of Attributable Debt deemed outstanding with respect to Sale/Leaseback Transactions (reduced by the amount
applied pursuant to Section 4.09(b)), does not at any one time exceed 10% of Consolidated Adjusted Net Assets.
The mortgage or pledge of any property of the Company or any Subsidiary in favor of the United States or any State, or any department,
agency, instrumentality or political subdivision of either, to secure partial, progress, advance or other payments pursuant to the provisions of
any contract or statute shall not be deemed to create “Debt” secured by “Liens” within the meaning of those terms as used in this Indenture.
SECTIO 4.09 Limitation on Sale/Leaseback Transactions.
N
The Company shall not, and shall not permit any Principal Domestic Subsidiary to, enter into any Sale/Leaseback Transaction with any
Person (other than the Company or a Subsidiary) unless:
(a) the Company or such Principal Domestic Subsidiary would be entitled to incur Debt in a principal amount equal to the Attributable
Debt with respect to such Sale/Leaseback Transaction secured by a Lien on the property subject to such Sale/Leaseback Transaction pursuant
to Section 4.08 without equally and ratably securing the Securities pursuant to such covenant; or
(b) within a period commencing 12 months prior to the consummation of such Sale/Leaseback Transaction and ending 12 months after
the consummation thereof, the Company or any Subsidiary shall have applied an amount equal to all or a portion of the net proceeds of such
Sale/Leaseback Transaction (with any such amount not being so applied to be subject to Section 4.09(a)):
(1) to the voluntary defeasance or retirement of any Securities or any Funded Debt; or
(2) to the acquisition, construction, improvement or expansion of one or more Principal Properties.
For these purposes, the net proceeds of a Sale/Leaseback Transaction means an amount equal to the greater of (i) the net proceeds of the
sale or transfer of the property leased in such Sale/Leaseback Transaction and (ii) the fair value, as determined by the Board of Directors of the
Company and evidenced by a Board Resolution, of such property at the time of entering into such Sale/Leaseback Transaction.
-28-
ARTICLE V
SUCCESSORS SECTION
SECTIO 5.01 Limitations on Mergers and Consolidations.
N
Neither the Company nor the Guarantor shall, in any transaction or series of transactions, consolidate with or merge into any Person, or
sell, lease, convey, transfer or otherwise dispose of all or substantially all of its assets to any Person (other than a consolidation or merger of the
Company and the Guarantor or a sale, lease, conveyance, transfer or other disposition of all or substantially all of the assets of the Company to
the Guarantor or of the Guarantor to the Company), unless:
(1) either (a) the Company or the Guarantor, as the case may be, shall be the continuing Person or (b) the Person (if other than the
Company or the Guarantor) formed by such consolidation or into which the Company or the Guarantor is merged, or to which such sale, lease,
conveyance, transfer or other disposition shall be made (collectively, the “Successor”), is organized and validly existing under the laws of the
United States, any political subdivision thereof or any State thereof or the District of Columbia, and expressly assumes by supplemental
indenture, in the case of the Company, the due and punctual payment of the principal of, premium (if any) and interest on and any Additional
Amounts with respect to all the Securities and the performance of the Company’s covenants and obligations under this Indenture and the
Securities, or, in the case of the Guarantor, the performance of the Guarantee and the Guarantor’s covenants and obligations under this
Indenture and the Securities;
(2) immediately after giving effect to such transaction or series of transactions, no Default or Event of Default shall have occurred and be
continuing or would result therefrom; and
(3) the Company or the Guarantor, as the case may be, delivers to the Trustee an Officers’ Certificate and an Opinion of Counsel, each
stating that the transaction and such supplemental indenture comply with this Indenture.
SECTIO 5.02 Successor Person Substituted.
N
Upon any consolidation or merger of the Company or the Guarantor, as the case may be, or any sale, lease, conveyance, transfer or other
disposition of all or substantially all of the assets of the Company or the Guarantor in accordance with Section 5.01, the Successor formed by
such consolidation or into or with which the Company or the Guarantor is merged or to which such sale, lease, conveyance, transfer or other
disposition is made shall succeed to, and be substituted for, and may exercise every right and power of the Company or the Guarantor, as the
case may be, under this Indenture and the Securities with the same effect as if such Successor had been named as the Company or the
Guarantor, as the case may be, herein and the predecessor Company or Guarantor, in the case of a sale, conveyance, transfer or other
disposition, shall be released from all obligations under this Indenture, the Securities and, in the case of the Guarantor, the Guarantee.
-29-
ARTICLE VI
DEFAULTS AND REMEDIES SECTION
SECTIO 6.01 Events of Default.
N
Unless either inapplicable to a particular series or specifically deleted or modified in or pursuant to the supplemental indenture or Board
Resolution establishing such series of Securities or in the form of Security for such series, an “Event of Default,” wherever used herein with
respect to Securities of any series, occurs if:
(1) there is a default in the payment of interest on or any Additional Amounts with respect to any Security of that series when the same
becomes due and payable and such default continues for a period of 30 days;
(2) there is a default in the payment of (A) the principal of any Security of that series at its Maturity or (B) premium (if any) on any
Security of that series when the same becomes due and payable;
(3) there is a default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series, and such
default continues for a period of 30 days;
(4) the Company or the Guarantor fails to comply with any of its other covenants or agreements in, or provisions of, the Securities of such
series or this Indenture (other than an agreement, covenant or provision that has expressly been included in this Indenture solely for the benefit
of one or more series of Securities other than that series) which shall not have been remedied within the specified period after written notice, as
specified in the last paragraph of this Section 6.01;
(5) the Company or the Guarantor pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an involuntary case,
(C) consents to the appointment of a Bankruptcy Custodian of it or for all or substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors;
(6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that remains unstayed and in effect for 90 days
and that:
(A) is for relief against the Company or the Guarantor as debtor in an involuntary case,
-30-
(B) appoints a Bankruptcy Custodian of the Company or the Guarantor or a Bankruptcy Custodian for all or substantially all of the
property of the Company or the Guarantor, or
(C) orders the liquidation of the Company or the Guarantor; or
(7) any other Event of Default provided with respect to Securities of that series occurs.
The term “Bankruptcy Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.
When a Default is cured, it ceases.
Notwithstanding the foregoing provisions of this Section 6.01, if the principal of, premium (if any) or interest on or Additional Amounts
with respect to any Security is payable in a currency or currencies (including a composite currency) other than Dollars and such currency or
currencies are not available to the Company or the Guarantor for making payment thereof due to the imposition of exchange controls or other
circumstances beyond the control of the Company or the Guarantor (a “Conversion Event”), each of the Company and the Guarantor will be
entitled to satisfy its obligations to Holders of the Securities by making such payment in Dollars in an amount equal to the Dollar equivalent of
the amount payable in such other currency, as determined by the Company or the Guarantor, as the case may be, by reference to the Exchange
Rate on the date of such payment, or, if such rate is not then available, on the basis of the most recently available Exchange Rate.
Notwithstanding the foregoing provisions of this Section 6.01, any payment made under such circumstances in Dollars where the required
payment is in a currency other than Dollars will not constitute an Event of Default under this Indenture.
Promptly after the occurrence of a Conversion Event, the Company or the Guarantor shall give written notice thereof to the Trustee; and
the Trustee, promptly after receipt of such notice, shall give notice thereof in the manner provided in Section 11.02 to the Holders. Promptly
after the making of any payment in Dollars as a result of a Conversion Event, the Company or the Guarantor, as the case may be, shall give
notice in the manner provided in Section 11.02 to the Holders, setting forth the applicable Exchange Rate and describing the calculation of such
payments.
A Default under clause (4) or (7) of this Section 6.01 is not an Event of Default until the Trustee notifies the Company and the Guarantor,
or the Holders of at least 25% in principal amount of the then outstanding Securities of the series affected by such Default notify the Company,
the Guarantor and the Trustee, of the Default, and the Company or the Guarantor, as the case may be, fails to cure the Default within 90 days
after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a “Notice of Default.”
-31-
SECTIO 6.02 Acceleration.
N
If an Event of Default with respect to any Securities of any series at the time outstanding (other than an Event of Default specified in
clause (5) or (6) of Section 6.01) occurs and is continuing, the Trustee by notice to the Company and the Guarantor, or the Holders of at least
25% in principal amount of the then outstanding Securities of the series affected by such Event of Default by notice to the Company, the
Guarantor and the Trustee, may declare the principal of (or, if any such Securities are Original Issue Discount Securities, such portion of the
principal amount as may be specified in the terms of that series) and all accrued and unpaid interest on all then outstanding Securities of such
series, as the case may be, to be due and payable. Upon any such declaration, the amounts due and payable on the Securities shall be due and
payable immediately. If an Event of Default specified in clause (5) or (6) of Section 6.01 hereof occurs, such amounts shall ipso facto become
and be immediately due and payable without any declaration, notice or other act on the part of the Trustee or any Holder. The Holders of a
majority in principal amount of the then outstanding Securities of the series affected by such Event of Default by written notice to the Trustee
may rescind an acceleration and its consequences (other than nonpayment of principal of or premium or interest on or any Additional Amounts
with respect to the Securities) if the rescission would not conflict with any judgment or decree and if all existing Events of Default with respect
to Securities of that series have been cured or waived, except nonpayment of principal, premium, interest or any Additional Amounts that has
become due solely because of the acceleration.
SECTIO 6.03 Other Remedies.
N
If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of, or
premium, if any, or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent
permitted by law.
SECTIO 6.04 Waiver of Defaults.
N
Subject to Sections 6.07 and 9.02, the Holders of a majority in principal amount of the then outstanding Securities of any series by notice
to the Trustee may waive an existing or past Default or Event of Default with respect to such series and its consequences (including waivers
obtained in connection with a tender offer or exchange offer for Securities of such series or a solicitation of consents in respect of Securities of
such series, provided that in each case such offer or solicitation is made to all Holders of then outstanding Securities of such series), except
(1) a continuing Default or Event of Default in the payment of the principal of, or premium, if any, or interest on or any Additional Amounts
with respect to any Security or (2) a continued Default in respect of a provision that under Section 9.02 cannot be amended or supplemented
without the consent of each Holder affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other
Default or impair any right consequent thereon.
-32-
SECTIO 6.05 Control by Majority.
N
With respect to Securities of any series, the Holders of a majority in principal amount of the then outstanding Securities of such series
may direct in writing the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on it relating to or arising under an Event of Default described in clause (1), (2), (3), (4) or (7) of Section 6.01, and with
respect to all Securities, the Holders of a majority in principal amount of all the then outstanding Securities affected may direct in writing the
time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it
not relating to or arising under such an Event of Default. However, the Trustee may refuse to follow any direction that conflicts with applicable
law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders, or that may involve the Trustee in
personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such
direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion from
Holders directing the Trustee against all losses and expenses caused by taking or not taking such action.
SECTIO 6.06 Limitations on Suits.
N
Subject to Section 6.07 hereof, a Holder of a Security of any series may pursue a remedy with respect to this Indenture or the Securities of
such series only if:
(1) the Holder gives to the Trustee written notice of a continuing Event of Default with respect to such series;
(2) the Holders of at least 25% in principal amount of the then outstanding Securities of such series make a written request to the Trustee
to pursue the remedy;
(3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and
(5) during such 60-day period the Holders of a majority in principal amount of the Securities of that series do not give the Trustee a
direction inconsistent with the request.
A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder.
SECTIO 6.07 Rights of Holders to Receive Payment.
N
Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal of and
premium, if any, and interest on and any
-33-
Additional Amounts with respect to the Security, on or after the respective due dates expressed in the Security, or to bring suit for the
enforcement of any such payment on or after such respective dates, is absolute and unconditional and shall not be impaired or affected without
the consent of the Holder.
SECTIO 6.08 Collection Suit by Trustee.
N
If an Event of Default specified in clause (1) or (2) of Section 6.01 hereof occurs and is continuing, the Trustee is authorized to recover
judgment in its own name and as trustee of an express trust against the Company or the Guarantor for the amount of principal, premium (if
any), interest and any Additional Amounts remaining unpaid on the Securities of the series affected by the Event of Default, and interest on
overdue principal and premium, if any, and, to the extent lawful, interest on overdue interest, and such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel.
SECTIO 6.09 Trustee May File Proofs of Claim.
N
The Trustee is authorized to file such proofs of claim and other papers or documents and to take such actions, including participating as a
member, voting or otherwise, of any committee of creditors, as may be necessary or advisable to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed
in any judicial proceedings relative to the Company or the Guarantor or their respective creditors or properties and shall be entitled and
empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any Bankruptcy
Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the
Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and
counsel, and any other amounts due the Trustee under Section 7.07 out of the estate in any such proceeding, shall be denied for any reason,
payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other
properties which the Holders of the Securities may be entitled to receive in such proceeding whether in liquidation or under any plan of
reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or
accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the
rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTIO 6.10 Priorities.
N
If the Trustee collects any money pursuant to this Article VI, it shall pay out the money in the following order:
First : to the Trustee for amounts due under Section 7.07;
-34-
Second : to Holders for amounts due and unpaid on the Securities in respect of which or for the benefit of which such money has
been collected, for principal, premium (if any), interest and any Additional Amounts ratably, without preference or priority of any kind,
according to the amounts due and payable on such Securities for principal, premium (if any), interest and any Additional Amounts,
respectively; and
Third : to the Company.
The Trustee, upon prior written notice to the Company, may fix record dates and payment dates for any payment to Holders pursuant to
this Article VI.
To the fullest extent allowed under applicable law, if for the purpose of obtaining a judgment against the Company or the Guarantor in
any court it is necessary to convert the sum due in respect of the principal of, premium (if any) or interest on or Additional Amounts with
respect to the Securities of any series (the “Required Currency”) into a currency in which a judgment will be rendered (the “Judgment
Currency”), the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in
The City of New York the Required Currency with the Judgment Currency on the Business Day in The City of New York next preceding that
on which final judgment is given. None of the Company, the Guarantor or the Trustee shall be liable for any shortfall nor shall any of them
benefit from any windfall in payments to Holders of Securities under this Section 6.10 caused by a change in exchange rates between the time
the amount of a judgment against it is calculated as above and the time the Trustee converts the Judgment Currency into the Required Currency
to make payments under this Section 6.10 to Holders of Securities, but payment of such judgment shall discharge all amounts owed by the
Company and the Guarantor on the claim or claims underlying such judgment.
SECTIO 6.11 Undertaking for Costs.
N
In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the
suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys’ fees, against any party litigant in the suit,
having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by
the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% in principal amount of the then
outstanding Securities of any series.
ARTICLE VII
TRUSTEE SECTION
SECTIO 7.01 Duties of Trustee.
N
(a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in such exercise, as a prudent person would exercise or use under the circumstances in the
conduct of such person’s own affairs.
-35-
(b) Except during the continuance of an Event of Default with respect to the Securities of any series:
(1) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied
covenants or obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this
Indenture. However, the Trustee shall examine such certificates and opinions to determine whether, on their face, they appear to conform
to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated
therein).
(c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(1) this paragraph does not limit the effect of Section 7.01(b);
(2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to the
provisions of this Section 7.01.
(e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee may refuse
to perform any duty or exercise any right or power unless it receives indemnity or security satisfactory to it against any loss, liability or
expense.
(f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company
and the Guarantor. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Subject to
Section 6.10, all money received by the Trustee shall, until applied as herein provided, be held in trust for the payment of the principal of,
premium (if any) and interest on and Additional Amounts with respect to the Securities.
SECTIO 7.02 Rights of Trustee.
N
(a) The Trustee may conclusively rely on any document believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in the document.
-36-
(b) Before the Trustee acts or refrains from acting, it may require instruction, an Officers’ Certificate or an Opinion of Counsel or both to
be provided. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such instruction, Officers’
Certificate or Opinion of Counsel. The Trustee may consult at the Company’s expense with counsel of its selection and the advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by
it hereunder in good faith and in reliance thereon.
(c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its
rights or powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company or the Guarantor
shall be sufficient if signed by an Officer of the Company or the Guarantor, as the case may be.
(f) The Trustee shall not be obligated to make any investigation into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or
document.
(g) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other
Person employed to act hereunder.
(h) The Trustee may request that the Company deliver an Officers’ Certificate setting forth the names of individuals and/or titles of
officers authorized at such time to take specified actions pursuant to this Indenture, which Officers’ Certificate may be signed by any person
authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not
superseded.
(i) The Trustee shall not be deemed to know or have notice of any Default or Event of Default unless a Responsible Officer of the Trustee
has actual knowledge thereof or unless written notice of any event which is in fact such a Default or Event of Default is received by the Trustee
at the Corporate Trust Office of the Trustee, and such notice references the Securities and this Indenture.
(j) In no event shall the Trustee be responsible or liable for special, indirect, or consequential loss or damage of any kind whatsoever
(including, but not limited to, loss of profit) irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and
regardless of the form of action.
(k) In no event shall the Trustee be responsible or liable for any failure or delay in the performance of its obligations hereunder arising
out of or caused by, directly or indirectly, forces
-37-
beyond its control, including, without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil or military disturbances,
nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and
hardware) services; it being understood that the Trustee shall use reasonable efforts which are consistent with accepted practices in the banking
industry to resume performance as soon as practicable under the circumstances.
SECTIO 7.03 May Hold Securities.
N
The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the
Company, the Guarantor or any of their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the
same with like rights and duties. However, the Trustee is subject to Sections 7.10 and 7.11.
SECTIO 7.04 Trustee’s Disclaimer.
N
The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the
Company’s use of the proceeds from the Securities or any money paid to the Company or the Guarantor or upon the Company’s or the
Guarantor’s direction under any provision hereof, it shall not be responsible for the use or application of any money received by any Paying
Agent other than the Trustee and it shall not be responsible for any statement or recital herein or any statement in the Securities other than its
certificate of authentication.
SECTIO 7.05 Notice of Defaults.
N
If a Default or Event of Default with respect to the Securities of any series occurs and is continuing and it is known to the Trustee, the
Trustee shall mail to Holders of Securities of such series a notice of the Default or Event of Default within 90 days after it occurs. Except in the
case of a Default or Event of Default in payment of principal of, premium (if any) and interest on and Additional Amounts or any sinking fund
installment with respect to the Securities of such series, the Trustee may withhold the notice if and so long as a committee of its Responsible
Officers in good faith determines that withholding the notice is in the interests of Holders of Securities of such series.
SECTIO 7.06 Reports by Trustee to Holders.
N
Within 60 days after each September 15 of each year after the execution of this Indenture, the Trustee shall mail to Holders of a series,
the Guarantor and the Company a brief report dated as of such reporting date that complies with TIA Section 313(a); provided, however, that if
no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date with respect to a series, no report
need be transmitted to Holders of such series. The Trustee also shall comply with TIA Section 313(b). The Trustee shall also transmit by mail
all reports if and as required by TIA Sections 313(c) and 313(d).
A copy of each report at the time of its mailing to Holders of a series of Securities shall be filed by the Company or the Guarantor with
the SEC and each securities exchange, if any, on which the Securities of such series are listed. The Company shall notify the Trustee if and
when any series of Securities is listed on any securities exchange.
-38-
SECTIO 7.07 Compensation and Indemnity.
N
The Company agrees to pay to the Trustee for its acceptance of this Indenture and services hereunder such compensation as the Company
and the Trustee shall from time to time agree in writing. The Trustee’s compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company agrees to reimburse the Trustee upon request for all reasonable disbursements, advances and expenses
incurred by it. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee’s agents and counsel.
The Company and the Guarantor, jointly and severally, hereby indemnify the Trustee and any predecessor Trustee against any and all
loss, liability, damage, claim or expense, including taxes (other than taxes based upon, measured by or determined by the income of the
Trustee), incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set
forth in the next following paragraph. The Trustee shall notify the Company and the Guarantor promptly of any claim for which it may seek
indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the
Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent.
The Company shall not be obligated to reimburse any expense or indemnify against any loss or liability incurred by the Trustee through
the Trustee’s negligence or bad faith.
To secure the payment obligations of the Company in this Section 7.07, the Trustee shall have a lien prior to the Securities on all money
or property held or collected by the Trustee, except that held in trust to pay principal of, premium (if any) and interest on and any Additional
Amounts with respect to Securities of any series. Such lien and the Company’s obligations under this Section 7.07 shall survive the satisfaction
and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(5) or (6) occurs, the expenses
and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law.
SECTIO 7.08 Replacement of Trustee.
N
A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee’s
acceptance of appointment as provided in this Section 7.08.
The Trustee may resign and be discharged at any time with respect to the Securities of one or more series by so notifying the Company
and the Guarantor. The Holders of a majority in principal amount of the then outstanding Securities of any series may remove the Trustee with
respect to the Securities of such series by so notifying the Trustee, the Company and the Guarantor. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
-39-
(2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy
Law;
(3) a Bankruptcy Custodian or public officer takes charge of the Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, with respect to the Securities of one or
more series, the Company shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being
understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any
time there shall be only one Trustee with respect to the Securities of any particular series). Within one year after the successor Trustee with
respect to the Securities of any series takes office, the Holders of a majority in principal amount of the Securities of such series then
outstanding may appoint a successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee with respect to the Securities of any series does not take office within 30 days after the retiring or removed Trustee
resigns or is removed, the retiring or removed Trustee (at the expense of the Company), the Company, the Guarantor or the Holders of at least
10% in principal amount of the then outstanding Securities of such series may petition any court of competent jurisdiction for the appointment
of a successor Trustee with respect to the Securities of such series.
If the Trustee with respect to the Securities of a series fails to comply with Section 7.10, any Holder of Securities of such series may
petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee with respect to the
Securities of such series.
In case of the appointment of a successor Trustee with respect to all Securities, each such successor Trustee shall deliver a written
acceptance of its appointment to the retiring Trustee, to the Company and to the Guarantor. Thereupon the resignation or removal of the retiring
Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the retiring Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held
by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07.
In case of the appointment of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the
Guarantor, the retiring Trustee and each successor Trustee with respect to the Securities of one or more (but not all) series shall execute and
deliver an indenture supplemental hereto in which each successor Trustee shall accept such appointment and that (1) shall confer to each
successor Trustee all the rights, powers and duties of the retiring Trustee with respect to the Securities of that or those series to which the
appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall confirm that all the
rights, powers and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not
retiring shall continue to
-40-
be vested in the retiring Trustee and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or
facilitate the administration of the trusts hereunder by more than one Trustee. Nothing herein or in such supplemental indenture shall constitute
such Trustees co-trustees of the same trust, and each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust
or trusts hereunder administered by any other such Trustee. Upon the execution and delivery of such supplemental indenture, the resignation or
removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee shall have all the rights,
powers and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor
Trustee relates. On request of the Company or any successor Trustee, such retiring Trustee shall transfer to such successor Trustee all property
held by such retiring Trustee as Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee
relates. Such retiring Trustee shall, however, have the right to deduct its unpaid fees and expenses, including attorneys’ fees.
Notwithstanding replacement of the Trustee or Trustees pursuant to this Section 7.08, the obligations of the Company under Section 7.07
shall continue for the benefit of the retiring Trustee or Trustees.
SECTIO 7.09 Successor Trustee by Merger, etc.
N
Subject to Section 7.10, if the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust
business to, another corporation, the successor corporation without any further act shall be the successor Trustee; provided, however, that in the
case of a transfer of all or substantially all of its corporate trust business to another corporation, the transferee corporation expressly assumes all
of the Trustee’s liabilities hereunder.
In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion
or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated; and in case at that
time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of
any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which
it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have.
SECTIO 7.10 Eligibility; Disqualification.
N
There shall at all times be a Trustee hereunder which shall be a corporation or banking association organized and doing business under
the laws of the United States, any State thereof or the District of Columbia and authorized under such laws to exercise corporate trust power,
shall be subject to supervision or examination by Federal or State (or the District of Columbia) authority and shall have, or be a subsidiary of a
bank or bank holding company having, a combined capital and surplus of at least $50 million as set forth in its most recent published annual
report of condition.
-41-
The Indenture shall always have a Trustee who satisfies the requirements of TIA Sections 310(a)(1), 310(a)(2) and 310(a)(5). The Trustee
is subject to and shall comply with the provisions of TIA Section 310(b) during the period of time required by this Indenture. Nothing in this
Indenture shall prevent the Trustee from filing with the SEC the application referred to in the penultimate paragraph of TIA Section 310(b).
SECTIO 7.11 Preferential Collection of Claims Against the Company or the Guarantor.
N
The Trustee is subject to and shall comply with the provisions of TIA Section 311(a), excluding any creditor relationship listed in TIA
Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE VIII
DISCHARGE OF INDENTURE
SECTIO 8.01 Termination of the Company’s and the Guarantor’s Obligations.
N
(a) This Indenture shall cease to be of further effect with respect to the Securities of a series (except that the Company’s obligations under
Section 7.07, the Trustee’s and Paying Agent’s obligations under Section 8.03 and the rights, powers, protections and privileges accorded the
Trustee under Article VII shall survive), and the Trustee and the Guarantor, on demand of the Company, shall execute proper instruments
acknowledging the satisfaction and discharge of this Indenture with respect to the Securities of such series, when:
(1)
either:
(A) all outstanding Securities of such series theretofore authenticated and issued (other than destroyed, lost or stolen
Securities that have been replaced or paid) have been delivered to the Trustee for cancellation; or
(B) all outstanding Securities of such series not theretofore delivered to the Trustee for cancellation:
(i)
have become due and payable, or
(ii)
will become due and payable at their Stated Maturity within one year, or
(iii)
are to be called for redemption within one year under arrangements satisfactory to the Trustee for the
giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,
and, in the case of clause (i), (ii) or (iii) above, the Company or the Guarantor has irrevocably deposited or caused to be
deposited with the Trustee as funds (immediately available to the Holders in the case of clause (i)) in trust for such purpose
(x) cash in an amount, or
-42-
(y) Government Obligations, maturing as to principal and interest at such times and in such amounts as will ensure the
availability of cash in an amount or (z) a combination thereof, which will be sufficient, in the opinion (in the case of clauses
(y) and (z)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay and discharge the entire indebtedness on the Securities of such series for principal and
interest to the date of such deposit (in the case of Securities which have become due and payable) or for principal, premium,
if any, and interest to the Stated Maturity or Redemption Date, as the case may be; or
(C) the Company and the Guarantor have properly fulfilled such other means of satisfaction and discharge as is
specified, as contemplated by Section 2.01, to be applicable to the Securities of such series;
(2) the Company or the Guarantor has paid or caused to be paid all other sums payable by them hereunder with respect to the
Securities of such series; and
(3) the Company has delivered to the Trustee an Officers’ Certificate stating that all conditions precedent to satisfaction and
discharge of this Indenture with respect to the Securities of such series have been complied with, together with an Opinion of Counsel to
the same effect.
(b) Unless this Section 8.01(b) is specified as not being applicable to Securities of a series as contemplated by Section 2.01, the Company
may, at its option, terminate certain of its and the Guarantor’s respective obligations under this Indenture (“covenant defeasance”) with respect
to the Securities of a series if:
(1) the Company or the Guarantor has irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in
trust for the purpose of making the following payments, specifically pledged as security for and dedicated solely to the benefit of the
Holders of Securities of such series, (i) money in the currency in which payment of the Securities of such series is to be made in an
amount, or (ii) Government Obligations with respect to such series, maturing as to principal and interest at such times and in such
amounts as will ensure the availability of money in the currency in which payment of the Securities of such series is to be made in an
amount or (iii) a combination thereof, that is sufficient, in the opinion (in the case of clauses (ii) and (iii)) of a nationally recognized firm
of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal of and
premium (if any) and interest on all Securities of such series on each date that such principal, premium (if any) or interest is due and
payable and (at the Stated Maturity thereof or upon redemption as provided in Section 8.01(e)) to pay all other sums payable by it
hereunder; provided that the Trustee shall have been irrevocably instructed to apply such money and/or the proceeds of such Government
Obligations to the payment of said principal, premium (if any) and interest with respect to the Securities of such series as the same shall
become due;
-43-
(2) the Company has delivered to the Trustee an Officers’ Certificate stating that all conditions precedent to satisfaction and
discharge of this Indenture with respect to the Securities of such series have been complied with, and an Opinion of Counsel to the same
effect;
(3) no Default or Event of Default with respect to the Securities of such series shall have occurred and be continuing on the date of
such deposit;
(4) the Company shall have delivered to the Trustee an Opinion of Counsel from a nationally recognized counsel acceptable to the
Trustee or a tax ruling to the effect that the Holders will not recognize income, gain or loss for U.S. Federal income tax purposes as a
result of the Company’s exercise of its option under this Section 8.01(b) and will be subject to U.S. Federal income tax on the same
amount and in the same manner and at the same times as would have been the case if such option had not been exercised;
(5) the Company and the Guarantor have complied with any additional conditions specified pursuant to Section 2.01 to be
applicable to the discharge of Securities of such series pursuant to this Section 8.01; and
(6) such deposit and discharge shall not cause the Trustee to have a conflicting interest as defined in TIA Section 310(b).
In such event, this Indenture shall cease to be of further effect (except as set forth in this paragraph), and the Trustee and the Guarantor,
on demand of the Company, shall execute proper instruments acknowledging satisfaction and discharge under this Indenture. However, the
Company’s and the Guarantor’s respective obligations in Sections 2.05, 2.06, 2.07, 2.08, 2.09, 4.01, 4.02, 7.07, 7.08, 8.04 and 10.01, the
Trustee’s and Paying Agent’s obligations in Section 8.03 and the rights, powers, protections and privileges accorded the Trustee under
Article VII shall survive until all Securities of such series are no longer outstanding. Thereafter, only the Company’s obligations in
Section 7.07 and the Trustee’s and Paying Agent’s obligations in Section 8.03 shall survive with respect to Securities of such series.
After such irrevocable deposit made pursuant to this Section 8.01(b) and satisfaction of the other conditions set forth herein, the Trustee
upon request shall acknowledge in writing the discharge of the Company’s and the Guarantor’s obligations under this Indenture with respect to
the Securities of such series except for those surviving obligations specified above.
In order to have money available on a payment date to pay principal of or premium (if any) or interest on the Securities, the Government
Obligations shall be payable as to principal or interest on or before such payment date in such amounts as will provide the necessary money.
Government Obligations shall not be callable at the issuer’s option.
(c) If the Company and the Guarantor have previously complied or are concurrently complying with Section 8.01(b) (other than any
additional conditions specified pursuant to Section 2.01 that are expressly applicable only to covenant defeasance) with respect to Securities of
a series, then, unless this Section 8.01(c) is specified as not being applicable to Securities of such series as contemplated by Section 2.01, the
Company may elect that its and the Guarantor’s
-44-
respective obligations to make payments with respect to Securities of such series be discharged (“legal defeasance”), if:
(1) no Default or Event of Default under clauses (5) and (6) of Section 6.01 hereof shall have occurred at any time during the period
ending on the 91st day after the date of deposit contemplated by Section 8.01(b) (it being understood that this condition shall not be
deemed satisfied until the expiration of such period);
(2) unless otherwise specified with respect to Securities of such series as contemplated by Section 2.01, the Company has delivered
to the Trustee an Opinion of Counsel from a nationally recognized counsel acceptable to the Trustee to the effect referred to in
Section 8.01(b)(4) with respect to such legal defeasance, which opinion is based on (i) a private ruling of the Internal Revenue Service
addressed to the Company, (ii) a published ruling of the Internal Revenue Service pertaining to a comparable form of transaction or (iii) a
change in the applicable federal income tax law (including regulations) after the date of this Indenture;
(3) the Company and the Guarantor have complied with any other conditions specified pursuant to Section 2.01 to be applicable to
the legal defeasance of Securities of such series pursuant to this Section 8.01(c); and
(4) the Company has delivered to the Trustee a Company Request requesting such legal defeasance of the Securities of such series
and an Officers’ Certificate stating that all conditions precedent with respect to such legal defeasance of the Securities of such series have
been complied with, together with an Opinion of Counsel to the same effect.
In such event, the Company and the Guarantor will be discharged from their respective obligations under this Indenture and the Securities
of such series to pay principal of, premium (if any) and interest on, and any Additional Amounts with respect to, Securities of such series, the
Company’s and the Guarantor’s respective obligations under Sections 4.01, 4.02 and 10.01 shall terminate with respect to such Securities, and
the entire indebtedness of the Company evidenced by such Securities and of the Guarantor evidenced by the related Guarantees shall be
deemed paid and discharged.
(d) If and to the extent additional or alternative means of satisfaction, discharge or defeasance of Securities of a series are specified to be
applicable to such series as contemplated by Section 2.01, each of the Company and the Guarantor may terminate any or all of its obligations
under this Indenture with respect to Securities of a series and any or all of its obligations under the Securities of such series if it fulfills such
other means of satisfaction and discharge as may be so specified, as contemplated by Section 2.01, to be applicable to the Securities of such
series.
(e) If Securities of any series subject to subsections (a), (b), (c) or (d) of this Section 8.01 are to be redeemed prior to their Stated
Maturity, whether pursuant to any optional redemption provisions or in accordance with any mandatory or optional sinking fund provisions, the
terms of the applicable trust arrangement shall provide for such redemption, and the Company shall make such arrangements as are reasonably
satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company.
-45-
SECTIO 8.02 Application of Trust Money.
N
The Trustee or a trustee satisfactory to the Trustee and the Company shall hold in trust money or Government Obligations deposited with
it pursuant to Section 8.01 hereof. It shall apply the deposited money and the money from Government Obligations through the Paying Agent
and in accordance with this Indenture to the payment of principal of, premium (if any) and interest on and any Additional Amounts with respect
to the Securities of the series with respect to which the deposit was made.
SECTIO 8.03 Repayment to Company or Guarantor.
N
The Trustee and the Paying Agent shall promptly pay to the Company or the Guarantor any excess money or Government Obligations (or
proceeds therefrom) held by them at any time upon the written request of the Company.
Subject to the requirements of any applicable abandoned property laws, the Trustee and the Paying Agent shall pay to the Company upon
written request any money held by them for the payment of principal, premium (if any), interest or any Additional Amounts that remain
unclaimed for two years after the date upon which such payment shall have become due. After payment to the Company, Holders entitled to the
money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person, and
all liability of the Trustee and the Paying Agent with respect to such money shall cease.
SECTIO 8.04 Reinstatement.
N
If the Trustee or the Paying Agent is unable to apply any money or Government Obligations deposited with respect to Securities of any
series in accordance with Section 8.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the obligations of the Company and the Guarantor under this
Indenture with respect to the Securities of such series and under the Securities of such series shall be revived and reinstated as though no
deposit had occurred pursuant to Section 8.01 until such time as the Trustee or the Paying Agent is permitted to apply all such money or
Government Obligations in accordance with Section 8.01; provided, however, that if the Company or the Guarantor has made any payment of
principal of, premium (if any) or interest on or any Additional Amounts with respect to any Securities because of the reinstatement of its
obligations, the Company or the Guarantor, as the case may be, shall be subrogated to the rights of the Holders of such Securities to receive
such payment from the money or Government Obligations held by the Trustee or the Paying Agent.
-46-
ARTICLE IX
SUPPLEMENTAL INDENTURES AND AMENDMENTS
SECTIO 9.01 Without Consent of Holders.
N
The Company, the Guarantor and the Trustee may amend or supplement this Indenture or the Securities or waive any provision hereof or
thereof without the consent of any Holder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Section 5.01;
(3) to provide for uncertificated Securities in addition to or in place of certificated Securities, or to provide for the issuance of bearer
Securities (with or without coupons);
(4) to provide any security for, or to add any guarantees of or additional obligors on, any series of Securities or the related Guarantees;
(5) to comply with any requirement in order to effect or maintain the qualification of this Indenture under the TIA;
(6) to add to the covenants of the Company or the Guarantor for the benefit of the Holders of all or any series of Securities (and if such
covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the
benefit of such series), or to surrender any right or power herein conferred upon the Company or the Guarantor;
(7) to add any additional Events of Default with respect to all or any series of the Securities (and, if any Event of Default is applicable to
less than all series of Securities, specifying the series to which such Event of Default is applicable);
(8) to change or eliminate any of the provisions of this Indenture; provided that any such change or elimination shall become effective
only when there is no outstanding Security of any series created prior to the execution of such amendment or supplemental indenture that is
adversely affected in any material respect by such change in or elimination of such provision;
(9) to establish the form or terms of Securities of any series as permitted by Section 2.01;
(10) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and
discharge of any series of Securities pursuant to Section 8.01; provided, however, that any such action shall not adversely affect the interest of
the Holders of Securities of such series or any other series of Securities in any material respect; or
(11) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or
more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of
the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 7.08.
-47-
Upon the request of the Company, accompanied by a Board Resolution, and upon receipt by the Trustee of the documents described in
Section 9.06, the Trustee shall, subject to Section 9.06, join with the Company and the Guarantor in the execution of any supplemental
indenture authorized or permitted by the terms of this Indenture and make any further appropriate agreements and stipulations that may be
therein contained.
SECTIO 9.02 With Consent of Holders.
N
Except as provided below in this Section 9.02, the Company, the Guarantor and the Trustee may amend or supplement this Indenture with
the written consent (including consents obtained in connection with a tender offer or exchange offer for Securities of any one or more series or
all series or a solicitation of consents in respect of Securities of any one or more series or all series, provided that in each case such offer or
solicitation is made to all Holders of then outstanding Securities of each such series (but the terms of such offer or solicitation may vary from
series to series)) of the Holders of at least a majority in principal amount of the then outstanding Securities of all series affected by such
amendment or supplement (acting as one class).
Upon the request of the Company, accompanied by a Board Resolution, and upon the filing with the Trustee of evidence of the consent of
the Holders as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.06, the Trustee shall, subject to Section 9.06,
join with the Company and the Guarantor in the execution of such amendment or supplemental indenture.
It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed
amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof.
The Holders of a majority in principal amount of the then outstanding Securities of one or more series or of all series may waive
compliance in a particular instance by the Company or the Guarantor with any provision of this Indenture with respect to Securities of such
series (including waivers obtained in connection with a tender offer or exchange offer for Securities of such series or a solicitation of consents
in respect of Securities of such series, provided that in each case such offer or solicitation is made to all Holders of then outstanding Securities
of such series (but the terms of such offer or solicitation may vary from series to series)).
However, without the consent of each Holder affected, an amendment, supplement or waiver under this Section 9.02 may not:
(1) reduce the amount of Securities whose Holders must consent to an amendment, supplement or waiver;
(2) reduce the rate of or change the time for payment of interest, including default interest, on any Security;
-48-
(3) reduce the principal of, any premium on or any mandatory sinking fund payment with respect to, or change the Stated Maturity of,
any Security or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 6.02;
(4) reduce the premium, if any, payable upon the redemption of any Security or change the time at which any Security may or shall be
redeemed;
(5) change any obligation of the Company or the Guarantor to pay Additional Amounts with respect to any Security;
(6) change the coin or currency or currencies (including composite currencies) in which any Security or any premium, interest or
Additional Amounts with respect thereto are payable;
(7) impair the right to institute suit for the enforcement of any payment of principal of, premium (if any) or interest on or any Additional
Amounts with respect to any Security pursuant to Sections 6.07 and 6.08, except as limited by Section 6.06;
(8) make any change in the percentage of principal amount of Securities necessary to waive compliance with certain provisions of this
Indenture pursuant to Section 6.04 or 6.07 or make any change in this sentence of Section 9.02; or
(9) waive a continuing Default or Event of Default in the payment of principal of, premium (if any) or interest on or Additional Amounts
with respect to the Securities.
A supplemental indenture that changes or eliminates any covenant or other provision of this Indenture which has expressly been included
solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with
respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any
other series.
The right of any Holder to participate in any consent required or sought pursuant to any provision of this Indenture (and the obligation of
the Company or the Guarantor to obtain any such consent otherwise required from such Holder) may be subject to the requirement that such
Holder shall have been the Holder of record of any Securities with respect to which such consent is required or sought as of a date identified by
the Company or the Guarantor in a notice furnished to Holders in accordance with the terms of this Indenture.
After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of each
Security affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or
any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver.
-49-
SECTIO 9.03 Compliance with Trust Indenture Act.
N
Every amendment or supplement to this Indenture or the Securities shall comply in form and substance with the TIA as then in effect.
SECTIO 9.04 Revocation and Effect of Consents.
N
Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every
subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder’s Security, even if notation of
the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his or her Security or
portion of a Security if the Trustee receives written notice of revocation before a date and time therefor identified by the Company or the
Guarantor in a notice furnished to such Holder in accordance with the terms of this Indenture or, if no such date and time shall be identified, the
date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver becomes effective in accordance with its
terms and thereafter binds every Holder.
The Company or the Guarantor may, but shall not be obligated to, fix a record date (which need not comply with TIA Section 316(c)) for
the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver or to take any other action under this
Indenture. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those Persons who were
Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment,
supplement or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No
consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of
Securities required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day
period.
After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it is of the type described in any of
clauses (1) through (9) of Section 9.02 hereof. In such case, the amendment, supplement or waiver shall bind each Holder who has consented to
it and every subsequent Holder that evidences the same debt as the consenting Holder’s Security.
SECTIO 9.05 Notation on or Exchange of Securities.
N
If an amendment or supplement changes the terms of an outstanding Security, the Company may require the Holder of the Security to
deliver it to the Trustee. The Trustee may place an appropriate notation on the Security at the request of the Company regarding the changed
terms and return it to the Holder. Alternatively, if the Company so determines, the Company in exchange for the Security shall issue, the
Guarantor shall execute and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such amendment or supplement.
-50-
Securities of any series authenticated and delivered after the execution of any amendment or supplement may, and shall if required by the
Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such amendment or supplement.
SECTIO 9.06 Trustee to Sign Amendments, etc.
N
The Trustee shall sign any amendment or supplement authorized pursuant to this Article if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or
refusing to sign such amendment or supplement, the Trustee shall be entitled to receive, and, subject to Section 7.01 hereof, shall be fully
protected in relying upon, an Officers’ Certificate and an Opinion of Counsel provided at the expense of the Company or the Guarantor as
conclusive evidence that such amendment or supplement is authorized or permitted by this Indenture, that it is not inconsistent herewith, and
that it will be valid and binding upon the Company and the Guarantor in accordance with its terms.
ARTICLE X
GUARANTEE
SECTIO 10.01 Guarantee.
N
Subject to Section 10.05, the Guarantor hereby unconditionally guarantees to the Holders from time to time of the Securities (a) the full
and prompt payment of the principal of and any premium on any Security when and as the same shall become due, whether at the Stated
Maturity thereof, by acceleration, redemption or otherwise, and (b) the full and prompt payment of any interest on and any Additional Amounts
with respect to any Security when and as the same shall become due, subject in each case to any applicable grace period. Each payment by the
Guarantor with respect to any Security shall be paid in the currency or currencies specified for payments on such Security as contemplated by
Section 2.01 and pursuant to this Indenture. The Guarantee hereunder constitutes a guarantee of payment and not of collection.
The obligations of the Guarantor hereunder with respect to a series of Securities shall be absolute and unconditional and, subject to
Article VIII, shall remain in full force and effect until the entire principal of, premium (if any) and interest on and any Additional Amounts
with respect to the Securities of such series shall have been paid or provided for in accordance with the provisions of such series and of this
Indenture, irrespective of the validity, regularity or enforceability of any Security of such series or this Indenture, any change or amendment
thereto, the absence of any action to enforce the same, any waiver or consent by the Trustee or the Holder of any Security of such series with
respect to any provision of such Security or this Indenture, the recovery of any judgment against the Company or any action to enforce the
same, or any other circumstances that may otherwise constitute a legal or equitable discharge or defense of the Guarantor. The Guarantor
hereby waives presentment or demand of payment or notice to the Guarantor with respect to such Security and the obligations evidenced
thereby or hereby. The Guarantor further waives any right of set-off or counterclaim it may have against any Holder of a Security arising from
any other obligations any such Holder may have to the Company or the Guarantor.
-51-
It is the intention of the Guarantor that the Guarantee not constitute a fraudulent transfer or conveyance for purposes of any Bankruptcy
Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable
to the Guarantee. To effectuate the foregoing intention, the obligations of the Guarantor hereunder shall be limited to the maximum amount as
will, after giving effect to such maximum amount and all other contingent and fixed liabilities of the Guarantor (other than guarantees of the
Guarantor in respect of subordinated debt) that are relevant under such laws, result in the obligations of the Guarantor hereunder not
constituting a fraudulent transfer or conveyance.
SECTIO 10.02 Proceedings Against Guarantor.
N
In the event of a default in the payment of principal of or any premium on any Security when and as the same shall become due, whether
at the Stated Maturity thereof, by acceleration, call for redemption or otherwise, or in the event of a default in any sinking fund payment, or in
the event of a default in the payment of any interest on or any Additional Amounts with respect to any Security when and as the same shall
become due, each of the Trustee and the Holder of such Security shall have the right to proceed first and directly against the Guarantor under
this Indenture without first proceeding against the Company or exhausting any other remedies which the Trustee or such Holder may have and
without resorting to any other security held by it.
The Trustee shall have the right, power and authority to do all things it deems necessary or advisable to enforce the provisions of this
Indenture relating to the Guarantee and to protect the interests of the Holders of the Securities and, in the event of a default in payment of the
principal of or any premium on any Security when and as the same shall become due, whether at the Stated Maturity thereof, by acceleration,
call for redemption or otherwise, or in the event of a default in the payment of any interest on or any Additional Amounts with respect to any
Security when and as the same shall become due, the Trustee may institute or appear in such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any of its rights and the rights of the Holders, whether for the specific enforcement of any
covenant or agreement in this Indenture relating to the Guarantee or in aid of the exercise of any power granted herein, or to enforce any other
proper remedy. Without limiting the generality of the foregoing, in the event of a default in payment of the principal of, premium (if any) and
interest on or any Additional Amounts with respect to any Security when due, the Trustee may institute a judicial proceeding for the collection
of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the
Guarantor and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Guarantor,
wherever situated.
SECTIO 10.03 Subrogation.
N
The Guarantor shall be subrogated to all rights against the Company of any Holder of Securities of a series in respect of any amounts paid
by the Guarantor pursuant to the provisions of the Guarantee; provided, however, that the Guarantor shall be entitled to enforce, or to receive
any payments arising out of or based upon, such right of subrogation only after the principal of, premium (if any) and interest on and any
Additional Amounts with respect to all Securities of such series have been paid in full.
-52-
SECTIO 10.04 Guarantee for Benefit of Holders.
N
The Guarantee contained in this Indenture is entered into by the Guarantor for the benefit of the Holders from time to time of the
Securities. Such provisions shall not be deemed to create any right in, or to be in whole or in part for the benefit of, any Person other than the
Trustee, the Guarantor, the Holders from time to time of the Securities and their permitted successors and assigns.
SECTIO 10.05 Effectiveness of Guarantee.
N
The Guarantee contained in this Indenture shall not be effective until such time as the Company and the Guarantor shall deliver an
Officers’ Certificate to the Trustee stating that the Guarantee contained in this Indenture is effective.
ARTICLE XI
MISCELLANEOUS
SECTIO 11.01 Trust Indenture Act Controls.
N
If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by operation of TIA Section 318(c), the imposed
duties shall control.
SECTIO 11.02 Notices.
N
Any notice or communication by the Company, the Guarantor or the Trustee to the others is duly given if in writing and delivered in
person or mailed by first-class mail (registered or certified, return receipt requested), telex, facsimile or overnight air courier guaranteeing next
day delivery, to the other’s address:
If to the Company:
Phillips 66
600 North Dairy Ashford
Houston, Texas 77079
Attn: General Counsel
Telephone: (281) 293-6600
Facsimile: (281) 293-6067
If to the Guarantor:
Phillips 66 Company c/o Phillips 66
600 North Dairy Ashford
Houston, Texas 77079
Attn: General Counsel
Telephone: (281) 293-6600
Facsimile: (281) 293-6067
-53-
If to the Trustee:
The Bank of New York Mellon Trust Company, N.A.
601 Travis Street, 16 th Floor
Houston, Texas 77002
Attn: Corporate Trust Administration
Telephone: (713) 483-6536
Facsimile: (713) 483-6954
The Company, the Guarantor or the Trustee by notice to the others may designate additional or different addresses for subsequent notices
or communications.
All notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if by
facsimile; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first-class mail, postage prepaid, to the Holder’s address shown on the
register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with
respect to other Holders.
If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the
addressee receives it, except in the case of notice to the Trustee, it is duly given only when received.
If the Company or the Guarantor mails a notice or communication to Holders, it shall mail a copy to the others and to the Trustee and
each Agent at the same time.
All notices or communications, including without limitation notices to the Trustee, the Company or the Guarantor by Holders, shall be in
writing, except as otherwise set forth herein.
In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice
required by this Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient
mailing of such notice.
In addition to the foregoing, the Trustee agrees to accept and act upon notice, instructions or directions pursuant to this Indenture sent by
unsecured e-mail or other similar unsecured electronic methods. If the party elects to give the Trustee e-mail instructions (or instructions by a
similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions
shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s
reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written
instruction. The party providing electronic instructions agrees to assume all risks arising out of the use of such electronic methods to submit
instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk
or interception and misuse by third parties.
-54-
SECTIO 11.03 Communication by Holders with Other Holders.
N
Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the
Securities. The Company, the Guarantor, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c).
SECTIO 11.04 Certificate and Opinion as to Conditions Precedent.
N
Upon any request or application by the Company or the Guarantor to the Trustee to take any action under this Indenture, the Company or
the Guarantor, as the case may be, shall, if requested by the Trustee, furnish to the Trustee at the expense of the Company or the Guarantor, as
the case may be:
(1) an Officers’ Certificate (which shall include the statements set forth in Section 11.05) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel (which shall include the statements set forth in Section 11.05 hereof) stating that, in the opinion of such
counsel, all such conditions precedent and covenants have been complied with.
SECTIO 11.05 Statements Required in Certificate or Opinion.
N
Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include:
(1) a statement that the Person making such certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him or
her to express an informed opinion as to whether or not such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with.
-55-
SECTIO 11.06 Rules by Trustee and Agents.
N
The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or the Paying Agent may make reasonable
rules and set reasonable requirements for its functions.
SECTIO 11.07 Legal Holidays.
N
If a payment date is a Legal Holiday at a Place of Payment, payment may be made at that place on the next succeeding day that is not a
Legal Holiday, and no interest shall accrue for the intervening period.
SECTIO 11.08 No Recourse Against Others.
N
A director, officer, employee, stockholder, partner or other owner of the Company, the Guarantor or the Trustee, as such, shall not have
any liability for any obligations of the Company under the Securities, for any obligations of the Guarantor under the Guarantee, or for any
obligations of the Company, the Guarantor or the Trustee under this Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release shall be part of
the consideration for the issue of Securities.
SECTIO 11.09 Governing Law; Waiver of Jury Trial.
N
THIS INDENTURE, THE SECURITIES AND THE GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF
CONFLICTS OF LAWS TO THE EXTENT THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
EACH OF THE COMPANY AND THE GUARANTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT THAT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY.
SECTIO 11.10 No Adverse Interpretation of Other Agreements.
N
This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company, the Guarantor or any Subsidiary.
Any such indenture, loan or debt agreement may not be used to interpret this Indenture.
SECTIO 11.11 Successors.
N
All agreements of the Company and the Guarantor in this Indenture and the Securities shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
-56-
SECTIO 11.12 Severability.
N
In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall, to the fullest extent permitted by applicable law, not in any way be affected or impaired
thereby.
SECTIO 11.13 Counterpart Originals.
N
The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the
same agreement.
SECTIO 11.14 Table of Contents, Headings, etc.
N
The table of contents, cross-reference table and headings of the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof.
-57-
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.
PHILLIPS 66
By: /s/ Frances M. Vallejo
Name: Frances M. Vallejo
Title: Vice President and Treasurer
PHILLIPS 66 COMPANY
By: /s/ Frances M. Vallejo
Name: Frances M. Vallejo
Title: Vice President and Treasurer
THE BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., as Trustee
By: /s/ Marcella Burgess
Name: Marcella Burgess
Title: Vice President
Exhibit 4.4
PHILLIPS 66
1.950% Senior Notes due 2015
2.950% Senior Notes due 2017
4.300% Senior Notes due 2022
5.875% Senior Notes due 2042
Fully and Unconditionally Guaranteed by
PHILLIPS 66 COMPANY
Four series of Securities are hereby established pursuant to Section 2.01 of the Indenture, dated as of March 12, 2012 (the
“Indenture”), among Phillips 66, as issuer (the “Company”), Phillips 66 Company, as guarantor (the “Guarantor”), and The Bank of New York
Mellon Trust Company, N.A., as trustee (the “Trustee”), as follows:
1. Each capitalized term used but not defined herein shall have the meaning assigned to such term in the Indenture.
2. The title of the 1.950% Senior Notes due 2015 shall be “1.950% Senior Notes due 2015” (the “2015 Notes”), the title of the
2.950% Senior Notes due 2017 shall be “2.950% Senior Notes due 2017” (the “2017 Notes”), the title of the 4.300% Senior Notes due 2022
shall be “4.300% Senior Notes due 2022” (the “2022 Notes”) and the title of the 5.875% Senior Notes due 2042 shall be “5.875% Senior Notes
due 2042” (the “2042 Notes” and, together with the 2015 Notes, the 2017 Notes and the 2022 Notes, the “Notes”).
3. The limit upon the aggregate principal amount of the 2015 Notes, the 2017 Notes, the 2022 Notes and the 2042 Notes that may
be authenticated and delivered under the Indenture (except for Notes of such series authenticated and delivered upon registration of transfer of,
or in exchange for, or in lieu of, other Notes of such series pursuant to Section 2.08, 2.09, 2.12, 2.17, 3.07 or 9.05 of the Indenture and except
for any Notes of such series which, pursuant to Section 2.04 or 2.17 of the Indenture, are deemed never to have been authenticated and
delivered thereunder) is $800,000,000, $1,500,000,000, $2,000,000,000 and $1,500,000,000, respectively; provided, however, that the
authorized aggregate principal amount of the Notes of each series may be increased before or after the issuance of any Notes of such series by a
Board Resolution (or action pursuant to a Board Resolution) to such effect; provided further, however, that the authorized aggregate principal
amount of the Notes of each series may be increased only if the additional Notes issued will be fungible with the original Notes of such series
for United States federal income tax purposes.
4. The Notes of each series shall be issued upon original issuance in whole in the form of one or more Global Securities (the
“Global Notes”). The Depository Trust Company and the Trustee are hereby designated as the Depositary and the Security Custodian,
respectively, for the Global Notes under the Indenture.
5. The Notes of each series and the Trustee’s certificate of authentication shall be substantially in the form of Annex A hereto (the
“Form of Note”).
6. The date on which the principal of the 2015 Notes, the 2017 Notes, the 2022 Notes and the 2042 Notes is payable shall be
March 5, 2015, May 1, 2017, April 1, 2022 and May 1, 2042, respectively.
7. The rate at which the 2015 Notes shall bear interest shall be 1.950% per annum. The rate at which the 2017 Notes shall bear
interest shall be 2.950% per annum. The rate at which the 2022 Notes shall bear interest shall be 4.300% per annum. The rate at which the
2042 Notes shall bear interest shall be 5.875% per annum. Interest on the Notes of each series shall be computed on the basis of a 360-day year
of twelve 30-day months. The Interest Payment Dates on which such interest shall be payable on the 2015 Notes shall be March 5 and
September 5 of each year, commencing September 5, 2012. The Interest Payment Dates on which such interest shall be payable on the 2017
Notes and the 2042 Notes shall be May 1 and November 1 of each year, commencing November 1, 2012. The Interest Payment Dates on which
such interest shall be payable on the 2022 Notes shall be April 1 and October 1 of each year, commencing October 1, 2012. The record dates
for the interest payable on the 2015 Notes on any Interest Payment Date shall be the February 20 and August 20, as the case may be, next
preceding such Interest Payment Date. The record dates for the interest payable on the 2017 Notes and the 2042 Notes on any Interest Payment
Date shall be the April 15 and October 15, as the case may be, next preceding such Interest Payment Date. The record dates for the interest
payable on the 2022 Notes on any Interest Payment Date shall be the March 15 and September 15, as the case may be, next preceding such
Interest Payment Date.
8. No Additional Amounts with respect to the Notes shall be payable. The date from which interest shall accrue for the Notes of
each series shall be March 12, 2012.
9. The place or places where the principal of, premium (if any) on and interest on the Notes shall be payable shall be the office or
agency of the Company maintained for that purpose, initially the office of the Trustee in The City of New York at 101 Barclay Street, New
York, New York 10286, and any other office or agency maintained by the Company for such purpose. Payments in respect of Global Notes
(including principal, premium, if any, and interest) shall be made by wire transfer of immediately available funds to the accounts specified by
the Holder of such Notes. In all other cases, at the option of the Company, payment of interest may be made by check mailed to the address of
the person entitled thereto as such address shall appear in the register of the Notes maintained by the Registrar.
10. The Paying Agent and Registrar for the Notes of each series initially shall be the Trustee.
11. The Notes of each series are subject to redemption, in whole or in part, at any time and from time to time, at the option of the
Company, in principal amounts of $2,000 and integral multiples of $1,000 above such amount, upon not less than 30 nor more than 60 days’
prior notice as provided in the Indenture, at a Redemption Price equal to the sum of (i) 100% of the principal amount of the Notes of such series
to be redeemed and (ii) the amount, if any, by which the sum of the present values of the Remaining Scheduled Payments thereon, discounted
to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus, in the
case of the 2015 Notes, 20 basis points, or, in the case of the 2017 Notes, 35 basis points or, in the case of the 2022 Notes, 35 basis points or, in
the case of the 2042 Notes, 45 basis points, exceeds the principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereon
to, but not including, the Redemption Date.
2
“Treasury Rate” means, with respect to any Redemption Date, the rate per annum equal to (i) the yield, under the heading which
represents the average for the immediately preceding week, appearing in the most recently published statistical release designated “H.15 (519)”
or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields
on actively traded United States Treasury securities adjusted to constant maturity under the caption “Treasury Constant Maturities,” for the
maturity corresponding to the Comparable Treasury Issue; provided that if no maturity is within three months before or after the Stated
Maturity for the applicable series of Notes, yields for the two published maturities most closely corresponding to the Comparable Treasury
Issue will be determined and the Treasury Rate will be interpolated or extrapolated from such yields on a straight-line basis rounding to the
nearest month; or (ii) if such release (or any successor release) is not published during the week preceding such calculation date or does not
contain such yields, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, calculated using
a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such
Redemption Date. The Treasury Rate shall be calculated by the Company on the third Business Day preceding such Redemption Date.
“Comparable Treasury Issue” means the United States Treasury security selected by an Independent Investment Banker that would
be used, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of
comparable maturity to the remaining term of the applicable series of Notes.
“Independent Investment Banker” means one of the Reference Treasury Dealers appointed by the Company.
“Comparable Treasury Price” means, with respect to any Redemption Date, (i) the average of the Reference Treasury Dealer
Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (ii) if the
Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Quotations.
“Reference Treasury Dealer” means each of Citigroup Global Markets Inc. (and its successors), Credit Suisse Securities (USA)
LLC (and its successors), J.P. Morgan Securities LLC (and its successors), RBS Securities Inc. (and its successors) and one other nationally
recognized investment banking firm that is a primary U.S. Government securities dealer (a “Primary Treasury Dealer”), specified from time to
time by the Company, provided, however, that if any of the foregoing shall cease to be a nationally recognized investment banking firm that is
a Primary Treasury Dealer, the Company shall substitute therefor another nationally recognized investment banking firm that is a Primary
Treasury Dealer.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any Redemption Date, the
average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of
its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer as of 3:30 p.m., New York time, on the third Business
Day preceding such Redemption Date.
3
“Remaining Scheduled Payments” means, with respect to each Note to be redeemed, the remaining scheduled payments of the
principal thereof and interest thereon that would be due after the related Redemption Date but for such redemption; provided, however, that, if
such Redemption Date is not an Interest Payment Date with respect to such Note, the amount of the next succeeding scheduled interest
payment thereon will be reduced by the amount of interest accrued thereon to such Redemption Date.
12. If the Distribution has not occurred, and if the Escrow Funds have not been released from the Escrow in accordance with
Section 4(a) of the Escrow Agreements, on or prior to the earlier of (i) December 31, 2012, or (ii) the date that the Board of Directors of
ConocoPhillips, a Delaware corporation, determines in its good faith judgment that the Distribution will not occur, and that the Escrow Funds
will not be released from the Escrow Account in accordance with Section 4(a) of the Escrow Agreements, by December 31, 2012 (such earlier
date, the “Date of Determination”), the Company shall redeem each Note (the “Mandatory Redemption”), on the date that is five Business Days
after the Date of Determination (the “Mandatory Redemption Date”), at the Mandatory Redemption Price.
Upon the receipt of written instruction from the Company, which instruction shall include a statement that the Date of
Determination has occurred and a notice as to the amount of the Mandatory Redemption Price, and an Officers’ Certificate and Opinion of
Counsel, each to the effect that all conditions precedent provided for in the Indenture to the Mandatory Redemption have been complied with,
which the Company is required to provide by the close of business on the Date of Determination, the Trustee shall send a notice of such
Mandatory Redemption on behalf of the Company to the Holders of the Notes (in the form provided to it by the Company) on the next
Business Day after the Date of Determination.
“Distribution” means the distribution of all of the shares of common stock, par value $0.01 per share, of the Company owned by
ConocoPhillips to stockholders of ConocoPhillips as of the record date for the distribution.
“Escrow Account” and “Escrow Funds” shall have the meanings ascribed to such terms in the Escrow Agreements.
“Escrow Agreements” means (i) the Escrow Agent Agreement, dated as of March 12, 2012, among the Company, the Trustee and
JPMorgan Chase Bank, N.A., as escrow agent, and (ii) the Escrow Agent Agreement, dated as of March 12, 2012, among the Company, the
Trustee and Deutsche Bank Trust Company Americas, as escrow agent.
“Mandatory Redemption Price” means a cash redemption price equal to 101% of the principal amount of the applicable Note, plus
accrued and unpaid interest on such Note from the Issue Date to, but not including, the Mandatory Redemption Date.
13. Except as set forth in Section 12, the Company shall have no obligation to redeem, purchase or repay Notes pursuant to any
sinking fund or analogous provision or at the option of a Holder thereof.
4
14. The initial offering and sale of the Notes shall not be registered under the Securities Act or any state securities laws. The Notes
shall be offered in reliance upon Rule 144A and Regulation S promulgated under the Securities Act. The Notes shall be entitled to the benefit
of Section 4.03(b) of the Indenture (and accordingly constitute Rule 144A Securities, as defined in the Indenture).
15. For so long as any of the Notes constitute “restricted securities” within the meaning of Rule 144(a)(3) promulgated under the
Securities Act, the Company shall, if the Company is not then subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act,
furnish to any Holder or beneficial owner of such Notes, or to any prospective purchaser of such Notes designated by such Holder or beneficial
owner, in each case upon the written request of such Holder, beneficial owner or prospective purchaser, the information required to be provided
pursuant to Rule 144A(d)(4) promulgated under the Securities Act.
16. Notes of each series initially sold to “qualified institutional buyers” (as defined in Rule 144A) (“QIBs”) in the United States in
reliance on Rule 144A under the Securities Act (the “Rule 144A Notes”) shall be issued in the form of one or more permanent Global
Securities of such series, without interest coupons, including appropriate legends as set forth herein (the “Rule 144A Global Notes” of such
series), deposited with the Trustee, as Security Custodian for the Depositary. Notes of each series initially sold to non-U.S. persons outside the
United States in offshore transactions in reliance on Regulation S under the Securities Act (the “Regulation S Notes”) shall initially be issued in
the form of a temporary Global Security of such series, without interest coupons, including appropriate legends as set forth herein (the
“Temporary Regulation S Global Note” of such series), deposited with the Trustee, as custodian for the Depositary. Upon expiration of a
40-day “distribution compliance period” as defined in Regulation S (the “Distribution Compliance Period”), and upon the receipt by the
Trustee of a written certificate from the Depositary, together with copies of certificates from Euroclear Bank S.A./N.V. (“Euroclear”), as
operator of the Euroclear System, and Clearstream Banking, société anonyme (“Clearstream”), certifying that they have received certification
of non-United States beneficial ownership of 100% of the aggregate principal amount of the Temporary Regulation S Global Note of a series
(except to the extent of any beneficial owners thereof who acquired an interest therein during the Distribution Compliance Period pursuant to
another exemption from registration under the Securities Act, or in a transaction not subject to registration under the Securities Act, and who
will take delivery of a beneficial ownership interest in a Rule 144A Global Note of such series), the Temporary Regulation S Global Note of
such series shall become a permanent Global Security of such series under the Indenture (the “Permanent Regulation S Global Note” of such
series and, together with the Rule 144A Global Note of such series and the Temporary Regulation S Global Note of such series, the “Global
Notes” of such series), and beneficial interests in such Temporary Regulation S Global Note shall become beneficial interests in the Permanent
Regulation S Global Note. Notwithstanding anything else to the contrary set forth herein or in the Indenture, in no event shall beneficial
interests in the Temporary Regulation S Global Note of a series be transferred or exchanged for Notes of such series in definitive form prior to
(x) the expiration of the Distribution Compliance Period and (y) the receipt by the Registrar of any certificates required pursuant to Rule
903(b)(3)(ii)(B) of Regulation S.
17. (a) Except as permitted by Section 17(c) or Section 18(d) hereof, each Rule 144A Global Note (and all Notes issued in exchange
therefor or in substitution thereof)
5
shall bear the following legend (the “Private Placement Legend”) and shall be subject to the transfer restrictions set forth therein (each defined
term in the legend being defined as such for purposes of the legend only):
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, AGREES ON ITS OWN BEHALF AND ON BEHALF
OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE
TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE “RESALE RESTRICTION TERMINATION DATE”) THAT IS
ONE YEAR AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE
COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR
OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS
BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY
BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO
OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S
UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S AND THE TRUSTEE’S
RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE
DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO
EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE.
(b) Each Temporary Regulation S Global Note shall bear the following legend:
THE RIGHTS ATTACHING TO THIS SECURITY, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS
EXCHANGE FOR CERTIFICATED SECURITIES, ARE AS SPECIFIED IN THIS SECURITY AND PURSUANT TO THE
INDENTURE (AS DEFINED HEREIN).
6
(c) Notwithstanding the foregoing, upon consummation of the Exchange Offer (as defined in the Registration Rights Agreement),
the Company shall issue and, at the direction of the Company, the Trustee shall authenticate Exchange Notes in exchange for Notes accepted
for exchange in the Exchange Offer, which Exchange Notes shall not bear the Private Placement Legend or the legend set forth in
Section 17(b), and the Security Custodian shall rescind any restriction on the transfer of such Exchange Notes.
“Additional Notes” means any Notes issued under the Indenture in addition to the Original Notes, including any Exchange Notes
issued in exchange for such Additional Notes, having the same terms in all respects as the Original Notes, or in all respects except with respect
to the initial Interest Payment Date and interest paid or payable on or prior to the first Interest Payment Date after the issuance of such
Additional Notes and such Additional Notes may have different issuance prices, initial interest accrual dates or initial interest payment dates
and may not have the benefit of any registration rights.
“Exchange Notes” means the Notes issued pursuant to the Indenture in exchange for, and up to an aggregate principal amount equal
to, the Initial Notes or Initial Additional Notes of such series in compliance with the terms of a Registration Rights Agreement and containing
terms substantially identical to the Initial Notes or Initial Additional Notes of such series (except that (i) such Exchange Notes will be
registered under the Securities Act and will not be subject to transfer restrictions or bear the Private Placement Legend (as defined in
Section 17(a)), and (ii) the provisions relating to Additional Interest will be eliminated).
“Initial Additional Notes” means Additional Notes issued in an offering not registered under the Securities Act and any Notes
issued in replacement thereof, but not including any Exchange Notes issued in exchange therefor.
“Initial Notes” means the Notes issued on the Issue Date and any Notes issued in replacement thereof, but not including any
Exchange Notes issued in exchange therefor.
“Original Notes” means the Initial Notes and any Exchange Notes issued in exchange therefor.
“Registration Rights Agreement” means (i) the Registration Rights Agreement dated on or about the Issue Date among the
Company, the Guarantor and the Initial Purchasers party thereto with respect to the Initial Notes, and (ii) with respect to any Additional Notes,
any registration rights agreements between the Company and the Initial Purchasers party thereto relating to rights given by the Company to the
purchasers of Additional Notes to register such Additional Notes or exchange them for Notes registered under the Securities Act.
18. (a) The following provisions shall apply with respect to any proposed transfer of a Rule 144A Note prior to the expiration of the
holding period applicable to sales of such Notes under Rule 144 of the Securities Act, and the Security Custodian shall refuse to register any
transfer of such Notes not complying with the restrictions set forth in the Private Placement Legend and in this Section 18. In addition to the
requirements set forth in Section 2.08 of the Indenture, Rule 144A Notes that are presented or surrendered for registration of transfer or
exchange pursuant to Section 2.08 of the Indenture shall be accompanied by the following
7
additional information and documents, as applicable, upon which the Security Custodian may conclusively rely:
(i) if such Notes are being delivered to the Security Custodian by a Holder for registration in the name of such Holder, without
transfer, a certification from such Holder to that effect (in substantially the form of Annex B hereto);
(ii) if such Notes are being transferred (1) to a QIB in accordance with Rule 144A, (2) pursuant to an exemption from
registration in accordance with Rule 144 under the Securities Act or (3) pursuant to an effective registration statement under the
Securities Act, a certification to that effect from such Holder (in substantially the form of Annex B hereto);
(iii) if such Notes are being transferred pursuant to an exemption from registration in accordance with Rule 903 or Rule 904 of
Regulation S, certifications to that effect from such Holder (in substantially the form of Annex B and Annex C hereto) and an
Opinion of Counsel to that effect if the Company or the Trustee so requests; or
(iv) if such Notes are being transferred in reliance on and in compliance with another exemption from the registration
requirements of the Securities Act, a certification to that effect from such Holder (in substantially the form of Annex B hereto) and
an Opinion of Counsel to that effect if the Company or the Trustee so requests.
(b) In addition to the requirements set forth in Section 2.08 of the Indenture, a holder of a beneficial interest in the Temporary
Regulation S Global Note who wishes to transfer its interest in such Note to a QIB in accordance with Rule 144A who takes delivery in the
form of a beneficial interest in the Rule 144A Global Note shall deliver to the Security Custodian a certification to that effect (in substantially
the form of Annex B hereto) upon which the Security Custodian may conclusively rely. After the expiration of the Distribution Compliance
Period, interests in the Regulation S Note may be transferred without requiring the certification set forth in this Section 18(b).
(c) The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depositary, in accordance
with Section 2.08 of the Indenture and Section 17 and Section 18 hereof (including the restrictions on transfer set forth therein and herein) and
the rules and procedures of the Depositary therefor, which shall include restrictions on transfer comparable to those set forth therein and herein
to the extent required by the Securities Act; provided, however , that prior to the expiration of the Distribution Compliance Period, transfers and
exchanges of beneficial interests in the Temporary Regulation S Global Note may be made pursuant to such restrictions only (1) to a Person
that is not a U.S. person or for the account or benefit of a Person that is not a U.S. person (other than an Initial Purchaser) within the meaning
of Regulation S under the Securities Act or (2) to a QIB, in each case that hold such interests through Euroclear or Clearstream.
(d) If Notes are issued upon the registration of transfer, exchange or replacement of Notes not bearing the Private Placement
Legend, the Notes so issued shall not
8
bear such legends. If Notes are issued upon the registration or transfer, exchange or replacement of Notes bearing the Private Placement
Legend, or if a request is made to remove the Private Placement Legend on a Note, the Notes so issued shall bear the Private Placement
Legend, or the Private Placement Legend shall not be removed, as the case may be, unless there is delivered to the Company and the Trustee
such satisfactory evidence, which may include an Opinion of Counsel of recognized standing licensed to practice law in the State of New York
and experienced in matters involving the Securities Act, as may be reasonably required by the Company or the Trustee that neither the Private
Placement Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of
Rule 144A, Rule 144 or Regulation S, that such Notes are not “restricted securities” within the meaning of Rule 144 or that such Notes were
transferred pursuant to an effective registration statement under the Securities Act. Upon provision of such satisfactory evidence, the Trustee, at
the direction of the Company, shall authenticate and deliver a Note that does not bear the Private Placement Legend. If a Private Placement
Legend is removed from the face of a Note and the Note is subsequently held by an Affiliate of the Company, the Private Placement Legend
shall be reinstated.
(e) Notwithstanding anything herein to the contrary, neither the Trustee nor the Security Custodian shall have any responsibility to
receive any letters, opinions or certifications, nor any responsibility to monitor compliance with any transfer restrictions, in connection with
any transfer or exchange of any beneficial interest in a Global Security for a beneficial interest in the same Global Security.
19. For purposes of Section 6.01(2) of the Indenture, any failure by the Company to consummate the Mandatory Redemption on the
Mandatory Redemption Date with respect to any series of Notes shall constitute the failure to pay the principal of such series at its Maturity and
the failure to pay premium on the Notes of such series when due and payable.
20. Without the consent of each Holder affected, an amendment, supplement or waiver under Section 9.02 of the Indenture may not
reduce the Mandatory Redemption Price with respect to any series of Notes or modify the Company’s obligation to consummate the Mandatory
Redemption on the Mandatory Redemption Date with respect to such series.
9
Annex A
[FORM OF FACE OF SECURITY]
[ FOR GLOBAL SECURITIES : UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF
THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF
SUCH SUCCESSOR DEPOSITARY. THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK), A
NEW YORK CORPORATION (“DTC”), SHALL ACT AS THE DEPOSITARY UNTIL A SUCCESSOR SHALL BE APPOINTED BY THE
COMPANY AND THE REGISTRAR. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE &
CO., HAS AN INTEREST HEREIN.]
[ FOR RULE 144A GLOBAL NOTE : THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY, BY ITS
ACCEPTANCE HEREOF, AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS
PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE
“RESALE RESTRICTION TERMINATION DATE”) THAT IS ONE YEAR AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF
THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A
REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS
THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS
AND SALES THAT OCCUR OUTSIDE THE
A-1
UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE
COMPANY’S AND THE TRUSTEE’S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES
(D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/ OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE
RESALE RESTRICTION TERMINATION DATE.]
[ FOR TEMPORARY REGULATION S GLOBAL NOTE : THE RIGHTS ATTACHING TO THIS SECURITY, AND THE CONDITIONS
AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED SECURITIES, ARE AS SPECIFIED IN THIS SECURITY
AND PURSUANT TO THE INDENTURE (AS DEFINED HEREIN).]
PHILLIPS 66
[1.950% SENIOR NOTE DUE 2015]
[2.950% SENIOR NOTE DUE 2017]
[4.300% SENIOR NOTE DUE 2022]
[5.875% SENIOR NOTE DUE 2042]
FULLY AND UNCONDITIONALLY GUARANTEED BY
PHILLIPS 66 COMPANY
CUSIP No.
ISIN No.
No.
$
Phillips 66, a Delaware corporation (the “Company,” which term includes any successor Person under the Indenture hereinafter referred
to), for value received, promises to pay to
or registered assigns, the principal sum of
Dollars[, or such
greater or lesser amount as indicated on the Schedule of Exchanges of Securities hereto,] 1 on [March 5, 2015] [May 1, 2017] [April 1, 2022]
[May 1, 2042].
Interest Payment Dates:
1
To be included only if the Security is a Global Security
A-2
[March 5 and September 5]
[May 1 and November 1]
[April 1 and October 1]
[May 1 and November 1]
Record Dates:
[February 20 and August 20]
[April 15 and October 15]
[March 15 and September 15]
[April 15 and October 15]
Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
A-3
IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized
officers.
Dated:
PHILLIPS 66
By:
Name:
Title:
By:
Name:
Title:
GUARANTEE
Phillips 66 Company, a Delaware corporation, unconditionally guarantees to the holder of this Security, upon the terms and subject
to the conditions set forth in the Indenture referenced on the reverse hereof, (a) the full and prompt payment of the principal of and any
premium on this Security when and as the same shall become due, whether at the stated maturity thereof, by acceleration, redemption or
otherwise, and (b) the full and prompt payment of interest on this Security when and as the same shall become due, subject to any applicable
grace period.
PHILLIPS 66 COMPANY
By:
Name:
Title:
A-4
Certificate of Authentication:
This is one of the Securities of the series
designated therein referred to in the withinmentioned Indenture.
THE BANK OF NEW YORK MELLON
TRUST COMPANY, N.A.,
as Trustee
By:
Authorized Signatory
Dated:
A-5
[FORM OF REVERSE OF SECURITY]
PHILLIPS 66
[1.950% SENIOR NOTE DUE 2015]
[2.950% SENIOR NOTE DUE 2017]
[4.300% SENIOR NOTE DUE 2022]
[5.875% SENIOR NOTE DUE 2042]
FULLY AND UNCONDITIONALLY GUARANTEED BY
PHILLIPS 66 COMPANY
This Security is one of a duly authorized issue of [1.950% Senior Notes due 2015] [2.950% Senior Notes due 2017] [4.300% Senior Notes due
2022] [5.875% Senior Notes due 2042] (the “Securities”) of Phillips 66, a Delaware corporation (the “Company”).
1. Interest . The Company promises to pay interest on the principal amount of this Security at [1.950%] [2.950%] [4.300%]
[5.875%] per annum from March 12, 2012 until maturity [and shall pay the Additional Interest payable pursuant to the Registration Rights
Agreement referred to below. References herein to “interest” include any such Additional Interest then owing]. The Company will pay interest
semiannually on [March 5 and September 5] [May 1 and November 1] [April 1 and October 1] [May 1 and November 1] of each year (each an
“Interest Payment Date”), or if any such day is not a Business Day, on the next succeeding Business Day. Interest on the Securities will accrue
from the most recent Interest Payment Date on which interest has been paid or, if no interest has been paid, from March 12, 2012; provided that
if there is no existing Default in the payment of interest, and if this Security is authenticated between a record date referred to on the face
hereof (each, a “Record Date”) and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest
Payment Date; provided, further , that the first Interest Payment Date shall be [September 5, 2012] [November 1, 2012] [October 1, 2012]
[November 1, 2012]. The Company shall pay interest on overdue principal and premium (if any) from time to time at a rate equal to the interest
rate then in effect; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) from time to time at
the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months.
2. Additional Interest. If, under the terms of the Registration Rights Agreement dated March 12, 2012 among the Company, Phillips
66 Company, a Delaware corporation (the “Guarantor”), and Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan
Securities LLC and RBS Securities Inc. (the “ Representatives ”), a Registration Default occurs with respect to this Security, the interest rate on
this Security will be increased by (i) 0.25% per annum for the first 90-day period beginning on the day immediately following such
Registration Default and (ii) an additional 0.25% per annum with respect to each subsequent 90-day period, in each case until and including the
date such Registration Default ends, up to a maximum increase of 1.00% per annum.
A-6
3. Method of Payment . The Company will pay interest on the Securities (except defaulted interest) to the Persons who are
registered Holders of Securities at the close of business on the Record Date next preceding the Interest Payment Date, even if such Securities
are canceled after such Record Date and on or before such Interest Payment Date. The Holder must surrender this Security to a Paying Agent to
collect principal payments. The Company will pay the principal of, premium (if any) on and interest on the Securities in money of the United
States of America that at the time of payment is legal tender for payment of public and private debts. Such amounts shall be payable at the
offices of the Trustee (as defined below), provided that at the option of the Company, the Company may pay such amounts (1) by wire transfer
with respect to Global Securities or (2) by check payable in such money mailed to a Holder’s registered address with respect to any Securities.
4. Paying Agent and Registrar . Initially, The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), the trustee under
the Indenture, will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar, co-registrar or additional paying
agent without notice to any Holder. The Company, the Guarantor or any Subsidiary of the Company may act in any such capacity.
5. Guarantee . Subject to the next paragraph, the Guarantor unconditionally guarantees to the Holders from time to time of the
Securities, upon the terms and subject to the conditions set forth in the Indenture (as defined below), (a) the full and prompt payment of the
principal of and any premium on the Securities when and as the same shall become due, whether at the Stated Maturity thereof, by acceleration,
redemption or otherwise, and (b) the full and prompt payment of any interest on the Securities when and as the same shall become due, subject
to any applicable grace period. The Guarantee constitutes a guarantee of payment and not of collection. In the event of a default in the payment
of principal of or any premium on the Securities when and as the same shall become due, whether at the Stated Maturity thereof, by
acceleration, call for redemption or otherwise, or in the event of a default in the payment of any interest on the Securities when and as the same
shall become due, subject to any applicable grace period, each of the Trustee and the Holders of the Securities shall have the right to proceed
first and directly against the Guarantor under the Indenture without first proceeding against the Company or exhausting any other remedies
which the Trustee or such Holder may have and without resorting to any other security held by it.
The Guarantee shall not be effective until such time as the Company and the Guarantor shall deliver an Officer’s Certificate to the
Trustee stating that the Guarantee is effective.
6. Indenture . The Company issued the Securities under an Indenture, dated as of March 12, 2012 (the “Indenture”), among the
Company, the Guarantor and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the “TIA”), as in effect on the date of execution of the Indenture. The Securities
are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of such terms and for the definitions of
capitalized terms used but not defined herein. The Securities are unsecured general obligations of the Company limited to [$800,000,000]
[$1,500,000,000] [$2,000,000,000] [$1,500,000,000] in aggregate principal amount; provided, however , that the authorized aggregate principal
amount of the Securities may be increased before or after the
A-7
issuance of any Securities by a Board Resolution (or action pursuant to a Board Resolution) to such effect; provided further, however, that the
authorized aggregate principal amount of the Securities may be increased only if the additional Securities issued will be fungible with the
original Securities for United States federal income tax purposes. The Indenture provides for the issuance of other series of debt securities
(including the Securities, the “Debt Securities”) thereunder.
7. Denominations, Transfer, Exchange . The Securities are in registered form without coupons in minimum denominations of
$2,000 and any integral multiples of $1,000 above such amount. The transfer of Securities may be registered and Securities may be exchanged
as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. Neither the Company, the Trustee nor the
Registrar shall be required to register the transfer or exchange of (a) any Security selected for redemption in whole or in part, except the
unredeemed portion of any Security being redeemed in part, or (b) any Security during the period beginning 15 Business Days before the
mailing of notice of redemption of Securities to be redeemed and ending at the close of business on the day of mailing.
8. Persons Deemed Owners . The registered Holder of a Security shall be treated as its owner for all purposes.
9. Redemption . The Securities are subject to redemption, in whole or in part, at any time and from time to time, at the option of the
Company, in principal amounts of $2,000 and integral multiples of $1,000 above such amount, upon not less than 30 nor more than 60 days’
prior notice as provided in the Indenture, at a Redemption Price equal to the sum of (i) 100% of the principal amount of the Securities to be
redeemed and (ii) the amount, if any, by which the sum of the present values of the Remaining Scheduled Payments thereon, discounted to the
Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus [20] [35]
[35] [45] basis points, exceeds the principal amount of the Securities to be redeemed, plus accrued and unpaid interest thereon to, but not
including, the Redemption Date.
“Treasury Rate” means, with respect to any Redemption Date, the rate per annum equal to (i) the yield, under the heading which
represents the average for the immediately preceding week, appearing in the most recently published statistical release designated “H.15 (519)”
or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields
on actively traded United States Treasury securities adjusted to constant maturity under the caption “Treasury Constant Maturities,” for the
maturity corresponding to the Comparable Treasury Issue; provided that if no maturity is within three months before or after the Stated
Maturity for the Securities, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue will be
determined and the Treasury Rate will be interpolated or extrapolated from such yields on a straight-line basis rounding to the nearest month;
or (ii) if such release (or any successor release) is not published during the week preceding such calculation date or does not contain such
yields, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for
the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such
Redemption Date. The Treasury Rate shall be calculated by the Company on the third Business Day preceding such Redemption Date.
A-8
“Comparable Treasury Issue” means the United States Treasury security selected by an Independent Investment Banker that would
be used, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of
comparable maturity to the remaining term of the Securities.
“Independent Investment Banker” means one of the Reference Treasury Dealers appointed by the Company.
“Comparable Treasury Price” means, with respect to any Redemption Date, (i) the average of the Reference Treasury Dealer
Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (ii) if the
Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Quotations.
“Reference Treasury Dealer” means each of Citigroup Global Markets Inc. (and its successors), Credit Suisse Securities (USA)
LLC (and its successors), J.P. Morgan Securities LLC (and its successors), RBS Securities Inc. (and its successors) and one other nationally
recognized investment banking firm that is a primary U.S. Government securities dealer (a “Primary Treasury Dealer”), specified from time to
time by the Company, provided, however, that if any of the foregoing shall cease to be a nationally recognized investment banking firm that is
a Primary Treasury Dealer, the Company shall substitute therefor another nationally recognized investment banking firm that is a Primary
Treasury Dealer.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any Redemption Date, the
average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of
its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer as of 3:30 p.m., New York time, on the third Business
Day preceding such Redemption Date.
“Remaining Scheduled Payments” means, with respect to each Security to be redeemed, the remaining scheduled payments of the
principal thereof and interest thereon that would be due after the related Redemption Date but for such redemption; provided, however, that, if
such Redemption Date is not an Interest Payment Date with respect to such Security, the amount of the next succeeding scheduled interest
payment thereon will be reduced by the amount of interest accrued thereon to such Redemption Date.
10. Mandatory Redemption. If the Distribution has not occurred, and if the Escrow Funds have not been released from the Escrow
Accounts in accordance with Section 4(a) of the Escrow Agreements, on or prior to the earlier of (i) December 31, 2012, or (ii) the date that the
Board of Directors of ConocoPhillips, a Delaware corporation, determines in its good faith judgment that the Distribution will not occur, and
that the Escrow Funds will not be released from the Escrow Accounts in accordance with Section 4(a) of the Escrow Agreements, by
December 31, 2012 (such earlier date, the “Date of Determination”), the Company shall redeem each Note (the “Mandatory Redemption”), on
the date that is five Business Days after the Date of Determination (the “Mandatory Redemption Date”), at the Mandatory Redemption Price.
A-9
Upon the receipt of written instruction from the Company, which instruction shall include a statement that the Date of
Determination has occurred and a notice as to the amount of the Mandatory Redemption Price, and an Officers’ Certificate and Opinion of
Counsel, each to the effect that all conditions precedent provided for in the Indenture to the Mandatory Redemption have been complied with,
which the Company is required to provide by the close of business on the Date of Determination, the Trustee shall send a notice of such
Mandatory Redemption on behalf of the Company to the Holders of the Notes (in the form provided to it by the Company) on the next
Business Day after the Date of Determination.
“Distribution” means the distribution of all of the shares of common stock, par value $0.01 per share, of the Company owned by
ConocoPhillips to stockholders of ConocoPhillips as of the record date for the distribution.
“Escrow Account” and “Escrow Funds” shall have the meanings ascribed to such terms in the Escrow Agreements.
“Escrow Agreements” means (i) the Escrow Agent Agreement, dated as of March 12, 2012, among the Company, the Trustee and
JPMorgan Chase Bank, N.A., as escrow agent, and (ii) the Escrow Agent Agreement, dated as of March 12, 2012, among the Company, the
Trustee and Deutsche Bank Trust Company Americas, as escrow agent.
“Mandatory Redemption Price” means a cash redemption price equal to 101% of the principal amount of the Security, plus accrued
and unpaid interest on such Note from the Issue Date to, but not including, the Mandatory Redemption Date.
11. Amendments and Waivers . Subject to certain exceptions and limitations, the Indenture or the Securities may be amended or
supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Securities of all series affected
by such amendment or supplement (acting as one class), and any existing or past Default or Event of Default under, or compliance with any
provision of, the Indenture may be waived (other than any continuing Default or Event of Default in the payment of the principal of, premium
(if any) on or interest on the Securities) by the Holders of at least a majority in principal amount of the then outstanding Securities of any series
or of all series (acting as one class) in accordance with the terms of the Indenture. Without the consent of any Holder, the Company, the
Guarantor and the Trustee may amend or supplement the Indenture or the Securities or waive any provision of either: (i) to cure any ambiguity,
omission, defect or inconsistency; (ii) if required, to provide for the assumption of the obligations of the Company or the Guarantor under the
Indenture in the case of the merger, consolidation or sale, lease, conveyance, transfer or other disposition of all or substantially all of the assets
of the Company or the Guarantor; (iii) to provide for uncertificated Securities in addition to or in place of certificated Securities or to provide
for the issuance of bearer Securities (with or without coupons); (iv) to provide any security for, or to add any guarantees of or additional
obligors on, the Securities or the related Guarantees; (v) to comply with any requirement in order to effect or maintain the qualification of the
Indenture under the TIA; (vi) to add to the covenants of the Company or the Guarantor for the benefit of the Holders of the Securities, or to
surrender any right or power conferred by the Indenture upon the
A-10
Company or the Guarantor; (vii) to add any additional Events of Default with respect to all or any series of the Debt Securities; (viii) to change
or eliminate any of the provisions of the Indenture, provided that no outstanding Security is adversely affected in any material respect; (ix) to
supplement any of the provisions of the Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of the
Securities pursuant to the Indenture; or (x) to evidence and provide for the acceptance of appointment under the Indenture by a successor
Trustee with respect to the Securities and to add to or change any of the provisions of the Indenture as shall be necessary to provide for or
facilitate the administration of the trusts thereunder by more than one Trustee, pursuant to the requirements of the Indenture.
The right of any Holder to participate in any consent required or sought pursuant to any provision of the Indenture (and the
obligation of the Company or the Guarantor to obtain any such consent otherwise required from such Holder) may be subject to the
requirement that such Holder shall have been the Holder of record of any Securities with respect to which such consent is required or sought as
of a date identified by the Company or the Guarantor in a notice furnished to Holders in accordance with the terms of the Indenture.
Without the consent of each Holder affected, the Company may not (i) reduce the amount of Debt Securities whose Holders must
consent to an amendment, supplement or waiver; (ii) reduce the rate of or change the time for payment of interest, including default interest, on
any Security; (iii) reduce the principal of or premium on, or change the Stated Maturity of, any Security; (iv) reduce the premium, if any,
payable upon the redemption of any Security or change the time at which any Security may or shall be redeemed; (v) change the coin or
currency in which any Security or any premium or interest with respect thereto is payable; (vi) impair the right to institute suit for the
enforcement of any payment of principal of or premium (if any) or interest on any Security, except as provided in the Indenture; (vii) make any
change in the percentage of principal amount of Debt Securities necessary to waive compliance with certain provisions of the Indenture or
make any change in the provision for modification; (viii) waive a continuing Default or Event of Default in the payment of principal of or
premium (if any) or interest on the Securities; or (viii) reduce the Mandatory Redemption Price on the Mandatory Redemption Date with
respect to the Securities.
A supplemental indenture that changes or eliminates any covenant or other provision of the Indenture which has expressly been
included solely for the benefit of one or more particular series of Debt Securities under the Indenture, or which modifies the rights of the
Holders of Debt Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under the
Indenture of the Holders of Debt Securities of any other series.
12. Defaults and Remedies . Events of Default are defined in the Indenture and generally include: (i) default for 30 days in payment
of any interest on the Securities; (ii) default in any payment of principal of or premium, if any, on the Securities when due and payable,
including, without limitation, any failure by the Company to consummate the Mandatory Redemption on the Mandatory Redemption Date with
respect to the Securities; (iii) default by the Company or the Guarantor in compliance with any of its other covenants or agreements in, or
provisions of, the Securities or in the Indenture which shall not have been remedied within 90 days after written notice by the Trustee or by the
holders of at least 25% in principal amount of the Securities then outstanding; or (iv) certain events involving bankruptcy,
A-11
insolvency or reorganization of the Company or the Guarantor. If an Event of Default occurs and is continuing, the Trustee by notice to the
Company and the Guarantor, or the Holders of at least 25% in principal amount of the then outstanding Securities of the series affected by such
Event of Default by notice to the Company, the Guarantor and the Trustee, may declare the principal of and interest on all the Securities to be
immediately due and payable, except that in the case of an Event of Default arising from certain events of bankruptcy, insolvency or
reorganization of the Company or the Guarantor, all outstanding Debt Securities under the Indenture become due and payable immediately
without further action or notice. The amount due and payable upon the acceleration of any Security is equal to 100% of the principal amount
thereof plus accrued interest to the date of payment. Holders may not enforce the Indenture or the Securities except as provided in the
Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders notice of any continuing default (except a default in payment of principal, premium or interest) if it
determines that withholding notice is in their interests. The Company and the Guarantor must furnish annual compliance certificates to the
Trustee.
13. Discharge Prior to Maturity . The Indenture with respect to the Securities shall be discharged and canceled upon the payment of
all of the Securities and shall be discharged except for certain obligations upon the irrevocable deposit with the Trustee of any combination of
funds and U.S. Government Obligations sufficient for such payment.
14. Trustee Dealings with Company and Guarantor. The Trustee, in its individual or any other capacity, may become the owner or
pledgee of Securities and may make loans to, accept deposits from, and perform services for the Company, the Guarantor or any of their
respective Affiliates, and may otherwise deal with the Company, the Guarantor or any such Affiliates, as if it were not Trustee.
15. No Recourse Against Others . A director, officer, employee, stockholder, partner or other owner of the Company, the Guarantor
or the Trustee, as such, shall not have any liability for any obligations of the Company under the Securities, for any obligations of the
Guarantor under the Guarantee or for any obligations of the Company, the Guarantor or the Trustee under the Indenture or for any claim based
on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability.
The waiver and release shall be part of the consideration for the issue of Securities.
16. Authentication . This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating
agent.
17. CUSIP Numbers . Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures,
the Company has caused CUSIP numbers to be printed on the Securities as a convenience to the Holders of the Securities. No representation is
made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers
printed thereon.
18. Abbreviations . Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in
common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (=
Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
A-12
The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Request may be made to:
Phillips 66
600 North Dairy Ashford
Houston, Texas 77079
Telephone: (281) 293-6600
Attention: Treasurer
A-13
SCHEDULE OF EXCHANGES OF SECURITIES*
The following exchanges of a part of this Global Security for other Securities have been made:
Date of Exchange
*
Amount of
Decrease in
Principal Amount
of this Global Security
Amount of
Increase in
Principal Amount
of this Global Security
To be included only if the Security is a Global Security
A-14
Principal Amount
of this Global
Security Following
Such Decrease
or Increase
Signature of
Authorized Officer
of Trustee or
Security Custodian
ASSIGNMENT FORM
To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to
(Insert assignee’s social security or tax I.D. number)
(Print or type assignee’s name, address and zip code)
and irrevocably
appoint
as agent to transfer this Security on the books of the Company. The agent may substitute another to act for him.
Date:
Your Signature:
(Sign exactly as your name appears on
the face of this Security)
Signature Guarantee:
(Participant in a Recognized Signature
Guaranty Medallion Program)
A-15
Annex B
FORM OF CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF NOTES
Re:
by
[1.950% Senior Notes due 2015] [2.950% Senior Notes due 2017] [4.300% Senior Notes due 2022] [5.875% Senior Notes due 2042] (the
“Notes”) of Phillips 66 (the “Company”)
This Certificate relates to $
principal amount of Notes held in *
(the “Transferor”).
book-entry or *
definitive form
The Transferor has requested the Security Custodian by written order to exchange or register the transfer of a Note or Notes or beneficial
interests therein (the “Transfer”).
In connection with such request and in respect of each such Note or beneficial interest therein, the Transferor does hereby certify that the
Transferor is familiar with the Indenture relating to the above-captioned Notes and that the Transfer does not require registration under the
Securities Act of 1933, as amended (the “Securities Act”), because:*

Such Note or beneficial interest is being acquired for the Transferor’s own account without transfer.

Such Note or beneficial interest is being transferred to (i) a “qualified institutional buyer” (as defined in Rule 144A under the Securities
Act), in accordance with Rule 144A under the Securities Act, that is purchasing for its own account or for the account of another
qualified institutional buyer, in each case to whom notice is given that the Transfer is being made in reliance on Rule 144A; or (ii) to a
non-U.S. person in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S under the Securities Act (and in the
case of clause (ii), based upon an opinion of counsel if the Company or the Trustee so requests, together with a certification in
substantially the form of Annex C to the Board Resolution, Officers’ Certificate or Company Order setting forth the terms of the Notes
pursuant to the Indenture).

Such Note or beneficial interest is being transferred pursuant to (i) an exemption from the registration requirements of the Securities Act
provided by Rule 144 or (ii) an effective registration statement under the Securities Act.

Such Note or beneficial interest is being transferred in reliance on and in compliance with another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel if the Company so requests).
*
Fill in blank or check appropriate box, as applicable.
B-1
[INSERT NAME OF TRANSFEROR]
By:
Name:
Title:
Address:
B-2
Annex C
FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS
PURSUANT TO REGULATION S
Re:
by
[1.950% Senior Notes due 2015] [2.950% Senior Notes due 2017] [4.300% Senior Notes due 2022] [5.875% Senior Notes due 2042] (the
“Notes”) of Phillips 66 (the “Company”)
This Certificate relates to $
principal amount of Notes held in *
(the “Transferor”).
book-entry or *
definitive form
The Transferor has requested the Security Custodian by written order to exchange or register the transfer of a Note or Notes or beneficial
interests therein (the “Transfer”) for an interest in the Regulation S Temporary Global Note to be held with [Euroclear] [Clearstream] through
the Depositary (in each case as defined in the Indenture related to the above-referenced Notes or the related Board Resolution, Officers’
Certificate or Company Order (each as defined in the Indenture)).
In connection with such request and in respect of each such Note or beneficial interest therein, the Transferor does hereby certify that the
Transferor is familiar with such Indenture and Board Resolution, Officers’ Certificate or Company Order and that:
*
(a)
the offer of such Notes or beneficial interests was not made to a person in the United States or for the benefit of a person in the
United States (other than an Initial Purchaser);
(b)
at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its
behalf reasonably believed that the transferee was outside the United States; or the transaction was executed in, on or through the
facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the
transaction was prearranged with a buyer in the United States;
(c)
no directed selling efforts have been made by the Transferor in the United States in contravention of the requirements of Rule
903(a) or Rule 904(a) of Regulation S under the U.S. Securities Act of 1933 (the “Securities Act”), as applicable;
(d)
the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and
(e)
if the proposed transfer is being made prior to the expiration of a 40-day “distribution compliance period” as defined in Regulation
S under the Securities Act, the transfer is being made (a) to a person that is not a U.S. person or for the account or benefit of a
person that is not a U.S. person within the meaning of Regulation S under the Securities Act; or (b) to a “qualified institutional
buyer” within the meaning of Rule 144A under the Securities Act, in each case that holds such Note or beneficial interests through
Euroclear Bank S.A./N.V., as operator of the Euroclear System, or Clearstream Banking, société anonyme.
Fill in blank or check appropriate box, as applicable.
C-1
The Company and the Trustee are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to
any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this
certificate have the meanings set forth in Regulation S under the Securities Act.
[INSERT NAME OF TRANSFEROR]
By:
Name:
Title:
Address:
C-2
Exhibit 4.5
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT dated March 12, 2012 (this “ Agreement ”) is entered into by and among Phillips 66, a
Delaware corporation (the “ Company ”), Phillips 66 Company, a Delaware corporation (the “ Guarantor ”), and Citigroup Global Markets Inc.
(“ Citigroup ”), Credit Suisse Securities (USA) LLC (“ Credit Suisse ”), J.P. Morgan Securities LLC (“ J.P. Morgan ”) and RBS Securities Inc.
(“ RBS ”) as representatives (the “ Representatives ”) of the initial purchasers listed in Schedule I to the Purchase Agreement (as defined
below) (the “ Initial Purchasers ”).
The Company, the Guarantor and the Representatives are parties to the Purchase Agreement dated March 12, 2012 (the “ Purchase
Agreement ”) and the Terms Agreement dated March 12, 2012, which provide for the sale by the Company to the Initial Purchasers of
(i) $800,000,000 aggregate principal amount of the Company’s 1.950% Senior Notes due 2015 (the “ 2015 Notes ”),
(ii) $1,500,000,000 aggregate principal amount of the Company’s 2.950% Senior Notes due 2017 (the “ 2017 Notes ”),
(iii) $2,000,000,000 aggregate principal amount of the Company’s 4.300% Senior Notes due 2022 (the “ 2022 Notes ”) and
(iv) $1,500,000,000 aggregate principal amount of the Company’s 5.875% Senior Notes due 2042 (the “ 2042 Notes ” and, together with the
2015 Notes, the 2017 Notes and the 2022 Notes, the “ Securities ”), which, pursuant to the terms of the Indenture (as defined below), will be
guaranteed on an unsecured senior basis by the Guarantor effective as of such time as the Company and the Guarantor shall deliver an Officers’
Certificate (as defined below) to the Trustee (as defined below) stating that the Guarantees (as defined below) are effective. As an inducement
to the Initial Purchasers to enter into the Purchase Agreement, the Company and the Guarantor have agreed to provide to the Initial Purchasers
and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a
condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions . As used in this Agreement, the following terms shall have the following meanings:
“ Business Day ” shall mean any day that is not a Saturday, Sunday or other day on which commercial banks in New York City or
Houston, Texas are authorized or required by law to remain closed.
“ Citigroup ” shall have the meaning set forth in the preamble.
“ Company ” shall have the meaning set forth in the preamble, including any successor of the Company.
“ Credit Suisse ” shall have the meaning set forth in the preamble.
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.
“ Exchange Dates ” shall have the meaning set forth in Section 2(a)(ii) hereof.
“ Exchange Offer ” shall mean the exchange offer by the Company and the Guarantor of Exchange Securities of each series for
Registrable Securities of such series pursuant to Section 2(a) hereof.
“ Exchange Offer Registration ” shall mean a registration under the Securities Act effected pursuant to Section 2(a) hereof.
“ Exchange Offer Registration Statement ” shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another
appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein
or deemed a part thereof, all exhibits thereto and any document incorporated by reference therein.
“ Exchange Securities ” shall mean senior notes of a series issued by the Company under the Indenture and guaranteed by the Guarantor
under the Indenture, containing terms identical to the applicable series of Securities (except that the Exchange Securities will not be subject to
restrictions on transfer or to any increase in annual interest rate for failure to comply with this Agreement) and to be offered to Holders in
exchange for Registrable Securities of such series pursuant to the Exchange Offer for such series.
“ FINRA ” means the Financial Industry Regulatory Authority, Inc.
“ Free Writing Prospectus ” means each free writing prospectus (as defined in Rule 405 under the Securities Act) prepared by or on
behalf of the Company or used or referred to by the Company in connection with the sale of the Securities or the Exchange Securities.
“ Guarantees ” shall mean the guarantees of the Securities and guarantees of the Exchange Securities by the Guarantor pursuant to the
Indenture.
“ Guarantor ” shall have the meaning set forth in the preamble, including any successor of the Guarantor.
“ Holders ” shall mean the Initial Purchasers, for so long as they own any Registrable Securities, and each of their successors, assigns and
direct and indirect transferees who become owners of Registrable Securities under the Indenture; provided that, for purposes of Section 4 and
Section 5 hereof, the term “Holders” shall include Participating Broker-Dealers.
“ Indemnified Person ” shall have the meaning set forth in Section 5(c) hereof.
“ Indemnifying Person ” shall have the meaning set forth in Section 5(c) hereof.
“ Indenture ” shall mean the Indenture dated as of March 12, 2012, among the Company, the Guarantor and The Bank of New York
Mellon Trust Company, N.A., as trustee, and as the same may be amended and supplemented from time to time in accordance with the terms
thereof with applicability to the Securities and the Exchange Securities.
“ Initial Purchasers ” shall have the meaning set forth in the preamble.
“ Inspector ” shall have the meaning set forth in Section 3(a)(xv) hereof.
“ Issuer Information ” shall have the meaning set forth in Section 5(a) hereof.
“ J.P. Morgan ” shall have the meaning set forth in the preamble.
“ Majority Holders ” shall mean the Holders of a majority of the aggregate principal amount of the outstanding Registrable Securities of
each series; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required
hereunder, any Registrable Securities owned directly or indirectly by the Company or any of its affiliates shall not be counted in determining
whether such consent or approval was given by the Holders of such required percentage or amount.
“ Notice and Questionnaire ” shall mean a notice of registration statement and selling security holder questionnaire distributed to a Holder
by the Company upon receipt of a Shelf Request from such Holder.
“ Officers’ Certificate ” shall have the meaning specified in the Indenture.
“ Participating Broker-Dealers ” shall have the meaning set forth in Section 4(a) hereof.
“ Participating Holder ” shall mean any Holder of Registrable Securities that has returned a completed and signed Notice and
Questionnaire to the Company in accordance with Section 2(b) hereof.
“ Person ” shall mean an individual, partnership, limited liability company, corporation, trust or unincorporated organization, or a
government or agency or political subdivision thereof.
“ Prospectus ” shall mean the prospectus included in, or, pursuant to the rules and regulations of the Securities Act, deemed a part of, a
Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus
supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by
a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, and in each case including any document
incorporated by reference therein.
“ Purchase Agreement ” shall have the meaning set forth in the preamble.
“ Registrable Securities ” shall mean the Securities; provided that the Securities shall cease to be Registrable Securities upon the earliest
to occur of the following: (i) when a Registration Statement with respect to such Securities has become effective under the Securities Act and
such Securities have been exchanged or disposed of pursuant to such Registration Statement; (ii) when such Securities cease to be outstanding;
(iii) except in the case of Securities that otherwise remain Registrable Securities and that are ineligible to be exchanged in the Exchange Offer,
when the Exchange Offer is consummated; (iv) when such Securities are sold pursuant to Rule 144 under the Securities Act (but not Rule
144A) or (v) the date that is three years after the date of this Agreement, provided that such date shall be extended by the number of days of
any permitted extension pursuant to Section 3(d) hereof.
“ Registration Default ” shall mean the occurrence of any of the following: (i) the Exchange Offer is not completed on or prior to the
Target Registration Date or the Shelf Registration Statement, if required pursuant to Section 2(b)(i) or Section 2(b)(ii) hereof, has not become
effective on or prior to the Target Registration Date, (ii) if the Company receives a Shelf Request pursuant to Section 2(b)(iii), the Shelf
Registration Statement required to be filed thereby has not become effective by the later of (a) the Target Registration Date and (b) 90 days
after delivery of such Shelf Request, (iii) the Shelf Registration Statement, if required by this Agreement, has become effective and thereafter
ceases to be effective or the Prospectus contained therein ceases to be usable for resales of Registrable Securities, in each case whether or not
permitted by this Agreement, at any time during the Shelf Effectiveness Period, and such failure to remain effective or usable for resales of
Registrable Securities exists for more than 90 days (whether or not consecutive) in any 12-month period or (iv) the Shelf Registration
Statement, if required by this Agreement, has become effective and thereafter, on more than two occasions of at least 30 consecutive days in
any 12-month period during the Shelf Effectiveness Period, the Shelf Registration Statement ceases to be effective or the Prospectus contained
therein ceases to be usable for resales of Registrable Securities, in each case whether or not permitted by this Agreement.
“ Registration Expenses ” shall mean any and all expenses incident to performance of or compliance by the Company and the Guarantor
with this Agreement, including without limitation: (i) all SEC, stock exchange or FINRA registration and filing fees, (ii) all fees and expenses
incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of one counsel for
any Underwriters or Holders in connection with blue sky qualification of any Exchange Securities or Registrable Securities), (iii) all expenses
of the Company and the Guarantor in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement,
any Prospectus, any Free Writing Prospectus and any amendments or supplements thereto, any underwriting agreements, securities sales
agreements or other similar agreements and any other documents relating to the performance of and compliance with this Agreement, (iv) all
rating agency fees incurred by the Company or the Guarantor (including with respect to maintaining ratings of the Securities), (v) all fees and
disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and
its counsel, (vii) the fees and disbursements of counsel for the Company and the Guarantor and, in the case of a Shelf Registration Statement,
the reasonable fees and disbursements of one counsel for the Participating Holders (which counsel shall be selected by the Participating
Holders holding a majority of the aggregate principal amount of Registrable Securities held by such Participating Holders and which counsel
may also be counsel for the Initial Purchasers) and (viii) the fees and disbursements of the independent registered public accountants of the
Company and the Guarantor, including the expenses of any special audits or “comfort” letters required by or incident to the performance of and
compliance with this Agreement, but excluding fees and expenses of counsel to the Underwriters (other than fees and expenses set forth in
clause (ii) above) or the Holders and underwriting discounts and commissions, brokerage commissions and transfer taxes, if any, relating to the
sale or disposition of Registrable Securities by a Holder.
“ Registration Statement ” shall mean any registration statement of the Company and the Guarantor that covers any of the Exchange
Securities or Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such registration
statement, including post-effective amendments, in each case including the Prospectus contained therein or deemed a part thereof, all exhibits
thereto and any document incorporated by reference therein.
“ Representatives ” shall have the meaning set forth in the preamble.
“ RBS ” shall have the meaning set forth in the preamble.
“ SEC ” shall mean the United States Securities and Exchange Commission.
“ Securities ” shall have the meaning set forth in the preamble.
“ Securities Act ” shall mean the Securities Act of 1933, as amended from time to time.
“ Shelf Effectiveness Period ” shall have the meaning set forth in Section 2(b) hereof.
“ Shelf Registration ” shall mean a registration effected pursuant to Section 2(b) hereof.
“ Shelf Registration Statement ” shall mean a “shelf” registration statement of the Company and the Guarantor that covers all or a portion
of the Registrable Securities (but no other securities unless approved by a majority in aggregate principal amount of the Registrable Securities
included on such Registration Statement held by the Participating Holders) on an appropriate form under Rule 415 under the Securities Act, or
any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein or deemed a part thereof, all exhibits thereto and any document
incorporated by reference therein.
“ Shelf Request ” shall have the meaning set forth in Section 2(b) hereof.
“ Staff ” shall mean the staff of the SEC.
“ Suspension Actions ” shall have the meaning set forth in Section 2(e) hereof.
“ Target Registration Date ” shall mean March 12, 2013.
“ Trust Indenture Act ” shall mean the Trust Indenture Act of 1939, as amended from time to time.
“ Trustee ” shall mean the trustee with respect to the Securities under the Indenture.
“ Underwriter ” shall have the meaning set forth in Section 3(e) hereof.
“ Underwritten Offering ” shall mean an offering in which Registrable Securities are sold to an Underwriter for reoffering to the public.
2. Registration Under the Securities Act .
(a) To the extent not prohibited by any applicable law or applicable interpretations of the Staff, the Company and the Guarantor shall use
their commercially reasonable efforts to
(x) cause to be filed an Exchange Offer Registration Statement covering an offer to the Holders to exchange all the Registrable Securities for
Exchange Securities and (y) have such Registration Statement become effective on or before the Target Registration Date and remain effective
until 180 days after the last Exchange Date for use by one or more Participating Broker-Dealers. The Company and the Guarantor shall
commence the Exchange Offer for each series promptly after the Exchange Offer Registration Statement is declared effective by the SEC and
use their commercially reasonable efforts to complete the Exchange Offer for such series not later than 60 days after such effective date.
After the Exchange Offer Registration Statement has become effective, the Company and the Guarantor shall commence the Exchange
Offer for each series of Registrable Securities by mailing the related Prospectus, appropriate letters of transmittal and other accompanying
documents to each Holder stating, in addition to such other disclosures as are required by applicable law, substantially the following:
(i) that such Exchange Offer is being made pursuant to this Agreement and that all Registrable Securities of such series validly
tendered and not properly withdrawn will be accepted for exchange;
(ii) the dates of acceptance for exchange (which shall be a period of at least 20 Business Days from the date such notice is mailed)
(each, an “ Exchange Date ”);
(iii) that any Registrable Security not tendered will remain outstanding and continue to accrue interest but will not retain any rights
under this Agreement, except as otherwise specified herein;
(iv) that any Holder electing to have a Registrable Security of a series exchanged pursuant to the Exchange Offer for such series
will be required to (A) surrender such Registrable Security, together with the appropriate letters of transmittal, to the institution and at the
address and in the manner specified in the notice, or (B) effect such exchange otherwise in compliance with the applicable procedures of
the depositary for such Registrable Security, in each case prior to the close of business on the last Exchange Date with respect to such
Exchange Offer; and
(v) that any Holder of Registrable Securities of a series will be entitled to withdraw its election, not later than the close of business
on the last Exchange Date with respect to the Exchange Offer for such series, by (A) sending to the institution and at the address specified
in the notice, a facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities
delivered for exchange and a statement that such Holder is withdrawing its election to have such Securities exchanged or (B) effecting
such withdrawal in compliance with the applicable procedures of the depositary for the Registrable Securities.
As a condition to participating in an Exchange Offer, a Holder will be required to represent to the Company and the Guarantor that
(1) any Exchange Securities to be received by it will be acquired in the ordinary course of its business, (2) at the time of the commencement of
such Exchange Offer it has no arrangement or understanding with any Person to participate in
the distribution (within the meaning of the Securities Act) of the Exchange Securities in violation of the provisions of the Securities Act, (3) it
is not an “affiliate” (within the meaning of Rule 405 under the Securities Act) of the Company or the Guarantor and (4) if such Holder is a
broker-dealer that will receive Exchange Securities for its own account in exchange for Registrable Securities that were acquired as a result of
market-making or other trading activities, then such Holder will deliver a Prospectus (or, to the extent permitted by law, make available a
Prospectus to purchasers) in connection with any resale of such Exchange Securities.
As soon as practicable after the last Exchange Date with respect to an Exchange Offer for Registrable Securities of a series, the Company
and the Guarantor shall:
(i) accept for exchange Registrable Securities of such series or portions thereof validly tendered and not properly withdrawn
pursuant to such Exchange Offer; and
(ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities of such series or portions thereof so
accepted for exchange by the Company and issue, and cause the Trustee to promptly authenticate and deliver to each Holder, Exchange
Securities of such series equal in principal amount to the principal amount of the Registrable Securities of such series tendered by such
Holder.
The Company and the Guarantor shall use their commercially reasonable efforts to complete each Exchange Offer as provided above and
shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws and regulations in connection
with each Exchange Offer. No Exchange Offer shall be subject to any conditions, other than that the Exchange Offer does not violate any
applicable law or applicable interpretations of the Staff.
(b) If (i) the Company and the Guarantor determine that the Exchange Offer provided for in Section 2(a) hereof is not available or the
Exchange Offer for Registrable Securities of a series may not be completed as soon as practicable after the last Exchange Date with respect to
such Exchange Offer because it would violate any applicable law or applicable interpretations of the Staff, (ii) such Exchange Offer is not for
any other reason completed by the Target Registration Date or (iii) prior to the last Exchange Date with respect to such Exchange Offer, the
Company receives a written request (a “ Shelf Request ”) from any Holder representing that it holds Registrable Securities of the applicable
series that are or were ineligible to be exchanged in such Exchange Offer, the Company and the Guarantor shall use their commercially
reasonable efforts to cause to be filed as soon as practicable after such determination, date or Shelf Request, as the case may be, a Shelf
Registration Statement providing for the sale of all the Registrable Securities of such series by the Holders thereof and to have such Shelf
Registration Statement become effective; provided that (a) no Holder will be entitled to have any Registrable Securities included in any Shelf
Registration Statement, or entitled to use the prospectus forming a part of such Shelf Registration Statement, until such Holder shall have
delivered a completed and signed Notice and Questionnaire and provided such other information regarding such Holder to the Company as is
contemplated by Section 3(b) hereof, and (b) the Company and the Guarantor shall be under no obligation to file any such Shelf Registration
Statement before they are obligated to file an Exchange Offer Registration Statement pursuant to Section 2(a) hereof.
If the Company and the Guarantor are required to file a Shelf Registration Statement pursuant to clause (iii) of the preceding sentence, the
Company and the Guarantor shall use their commercially reasonable efforts to file and have become effective both an Exchange Offer
Registration Statement pursuant to Section 2(a) hereof with respect to all Registrable Securities and a Shelf Registration Statement (which may
be a combined Registration Statement with the Exchange Offer Registration Statement) with respect to offers and sales of Registrable
Securities held by the Initial Purchasers after completion of the Exchange Offer.
The Company and the Guarantor agree to use their commercially reasonable efforts to keep the Shelf Registration Statement continuously
effective until the Securities covered thereby cease to be Registrable Securities (the “Shelf Effectiveness Period”). The Company and the
Guarantor further agree to supplement or amend the Shelf Registration Statement, the related Prospectus and any Free Writing Prospectus if
required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement
or by the Securities Act or by any other rules and regulations thereunder or if reasonably requested by a Participating Holder of Registrable
Securities with respect to information relating to such Holder, and to use their commercially reasonable efforts to cause any such amendment to
become effective, if required, and such Shelf Registration Statement, Prospectus or Free Writing Prospectus, as the case may be, to become
usable as soon as thereafter practicable. The Company and the Guarantor agree to furnish to the Participating Holders copies of any such
supplement or amendment promptly after its being used or filed with the SEC, as requested by the Participating Holders.
(c) The Company and the Guarantor shall pay all Registration Expenses in connection with any registration pursuant to Section 2(a) or
Section 2(b) hereof. Each Holder shall pay all underwriting discounts and commissions, brokerage commissions and transfer taxes, if any,
relating to the sale or disposition of such Holder’s Registrable Securities pursuant to the Shelf Registration Statement.
(d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof will not be deemed to have become effective unless it has
been declared effective by the SEC. A Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become
effective unless it has been declared effective by the SEC or is automatically effective upon filing with the SEC as provided by Rule 462 under
the Securities Act.
If a Registration Default occurs with respect to a series of Registrable Securities, the interest rate on the Registrable Securities of such
series will be increased by (i) 0.25% per annum for the first 90-day period beginning on the day immediately following such Registration
Default and (ii) an additional 0.25% per annum with respect to each subsequent 90-day period, in each case until and including the date such
Registration Default ends, up to a maximum increase of 1.00% per annum. A Registration Default ends when the Securities of such series cease
to be Registrable Securities or, if earlier, (1) in the case of a Registration Default under clause (i) or (ii) of the definition thereof, when the
Exchange Offer for such series is completed or when the Shelf Registration Statement covering such Registrable Securities becomes effective
or (2) in the case of a Registration Default under clause (iii) or clause (iv) of the definition thereof, when the Shelf Registration Statement again
becomes effective or the Prospectus again becomes usable. If at any time more than one Registration Default has occurred and is continuing,
then, until the
next date that there is no Registration Default, the increase in interest rate provided for by this paragraph shall apply as if there occurred a
single Registration Default that begins on the date that the earliest such Registration Default occurred and ends on such next date that there is
no Registration Default.
Anything herein to the contrary notwithstanding, if the applicable Exchange Offer is consummated, any Holder who was, at the time such
Exchange Offer was pending and consummated, eligible to exchange, and did not validly tender or withdrew, its Securities for Exchange
Securities in such Exchange Offer will not be entitled to receive any additional interest pursuant to the preceding paragraph, and such Securities
will no longer constitute Registrable Securities hereunder.
(e) The Company and the Guarantor shall be entitled to suspend their obligation to file any amendment to a Shelf Registration Statement,
furnish any supplement or amendment to a Prospectus included in a Shelf Registration Statement or any Free Writing Prospectus, make any
other filing with the SEC that would be incorporated by reference into a Shelf Registration Statement, cause a Shelf Registration Statement to
remain effective or the Prospectus or any Free Writing Prospectus usable or take any similar action (collectively, “ Suspension Actions ”) if
there is a possible acquisition or business combination or other transaction, business development or event involving the Company, the
Guarantor or either of their subsidiaries that may require disclosure in the Shelf Registration Statement or Prospectus and the Company or the
Guarantor determines that such disclosure is not in the best interest of the Company, the Guarantor and their stockholders or obtaining any
financial statements relating to any such acquisition or business combination required to be included in the Shelf Registration Statement or
Prospectus would be impracticable. Upon the occurrence of any of the conditions described in the foregoing sentence, the Company shall give
prompt notice of the delay or suspension (but not the basis thereof) to the Participating Holders. Upon the termination of such condition, the
Company shall promptly proceed with all Suspension Actions that were delayed or suspended and, if required, shall give prompt notice to the
Participating Holders of the cessation of the delay or suspension (but not the basis thereof).
(f) Without limiting the remedies available to the Initial Purchasers and the Holders, the Company and the Guarantor acknowledge that
any failure by the Company or the Guarantor to comply with their obligations under Section 2(a) and Section 2(b) hereof may result in material
irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure
damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may
be required to specifically enforce the Company’s and the Guarantor’s obligations under Section 2(a) and Section 2(b) hereof.
3. Registration Procedures .
(a) In connection with their obligations pursuant to Section 2(a) and Section 2(b) hereof, the Company and the Guarantor shall:
(i) prepare and file with the SEC a Registration Statement on the appropriate form under the Securities Act, which form (A) shall be
selected by the Company and the
Guarantor, (B) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the Participating Holders
thereof and (C) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by
reference all financial statements required by the SEC to be filed therewith; and use their commercially reasonable efforts to cause such
Registration Statement to become effective and remain effective for the applicable period in accordance with Section 2 hereof;
(ii) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement effective for the applicable period in accordance with Section 2 hereof and cause each
Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under
the Securities Act; and keep each Prospectus current during the period described in Section 4(3) of, and Rule 174 under, the Securities
Act that is applicable to transactions by brokers or dealers with respect to the Registrable Securities or Exchange Securities;
(iii) to the extent any Free Writing Prospectus is used, file with the SEC any Free Writing Prospectus that is required to be filed by
the Company or the Guarantor with the SEC in accordance with the Securities Act and to retain a copy of any Free Writing Prospectus
not required to be filed;
(iv) in the case of a Shelf Registration, furnish to each Participating Holder, to counsel for the Initial Purchasers, to counsel for such
Participating Holders and to each Underwriter of an Underwritten Offering of Registrable Securities, if any, without charge, as many
copies of each Prospectus, preliminary prospectus or Free Writing Prospectus, and any amendment or supplement thereto, as such
Participating Holder, counsel or Underwriter may reasonably request in order to facilitate the sale or other disposition of the Registrable
Securities thereunder; and, subject to Section 3(c) hereof, the Company and the Guarantor consent to the use of such Prospectus,
preliminary prospectus or such Free Writing Prospectus and any amendment or supplement thereto in accordance with applicable law by
each of the Participating Holders and any such Underwriters in connection with the offering and sale of the Registrable Securities covered
by and in the manner described in such Prospectus, preliminary prospectus or such Free Writing Prospectus or any amendment or
supplement thereto in accordance with applicable law;
(v) use their commercially reasonable efforts to register or qualify the Registrable Securities under all applicable state securities or
blue sky laws of such jurisdictions of the United States as any Participating Holder shall reasonably request in writing by the time the
applicable Registration Statement becomes effective; cooperate with such Participating Holders in connection with any filings required to
be made with FINRA; and do any and all other acts and things that may be reasonably necessary or advisable to enable each Participating
Holder to complete the disposition in each such jurisdiction of the Registrable Securities owned by such Participating Holder; provided
that neither the Company nor the Guarantor shall be required to (1) qualify as a foreign corporation or other entity or as a dealer in
securities in any such jurisdiction where it
would not otherwise be required to so qualify, (2) file any general consent to service of process in any such jurisdiction or (3) subject
itself to taxation in any such jurisdiction if it is not otherwise so subject;
(vi) notify counsel for the Initial Purchasers and, in the case of a Shelf Registration, notify each Participating Holder and counsel for
such Participating Holders promptly and, if requested by any such Participating Holder or counsel, confirm such notice in writing
(1) when a Registration Statement has become effective, when any post-effective amendment thereto has been filed and becomes
effective, when any Free Writing Prospectus has been filed or any amendment or supplement to the Prospectus or any Free Writing
Prospectus has been filed, (2) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness
of a Registration Statement or the initiation of any proceedings for that purpose, including the receipt by the Company of any notice of
objection of the SEC to the use of a Shelf Registration Statement or any post-effective amendment thereto pursuant to Rule 401(g)(2)
under the Securities Act, (3) if, between the applicable effective date of a Shelf Registration Statement and the closing of any sale of
Registrable Securities covered thereby, the representations and warranties of the Company or the Guarantor contained in any
underwriting agreement, securities sales agreement or other similar agreement, if any, relating to an offering of such Registrable
Securities cease to be true and correct in all material respects or if the Company or the Guarantor receives any notification with respect to
the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such
purpose, (4) of the happening of any event during the period a Registration Statement is effective that makes any statement made in such
Registration Statement or the related Prospectus or any Free Writing Prospectus untrue in any material respect or that requires the making
of any changes in such Registration Statement or Prospectus or any Free Writing Prospectus in order to make the statements therein not
misleading and (5) of any determination by the Company or the Guarantor that a post-effective amendment to a Registration Statement or
any amendment or supplement to the Prospectus or any Free Writing Prospectus would be appropriate;
(vii) notify counsel for the Initial Purchasers and, in the case of a Shelf Registration, notify each Participating Holder and counsel
for such Participating Holders promptly and, if requested by any such Participating Holder or counsel, confirm such notice in writing, of
any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement, Prospectus or any
Free Writing Prospectus or for additional information after the Registration Statement has become effective;
(viii) use their commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration
Statement or, in the case of a Shelf Registration, the resolution of any objection of the SEC pursuant to Rule 401(g)(2) under the
Securities Act, including by filing an amendment to such Registration Statement on the proper form, as soon as reasonably practicable
and provide prompt notice to each Holder or Participating Holder of the withdrawal of any such order or such resolution;
(ix) in the case of a Shelf Registration, furnish to each Participating Holder, without charge, upon request, at least one conformed
copy of each Registration Statement and any post-effective amendment thereto (without any documents incorporated therein by reference
or exhibits thereto, unless requested), if such documents are not available via EDGAR;
(x) in the case of a Shelf Registration, cooperate with the Participating Holders to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not bearing any restrictive legends and enable such Registrable Securities to
be issued in such denominations and, in the case of certificated securities, registered in such names (consistent with the provisions of the
Indenture) as such Participating Holders may reasonably request at least one Business Day prior to the closing of any sale of Registrable
Securities;
(xi) upon the occurrence of any event contemplated by Section 3(a)(vi)(4) hereof, use their commercially reasonable efforts to
prepare and file with the SEC a supplement or post-effective amendment to the applicable Exchange Offer Registration Statement or
Shelf Registration Statement or the related Prospectus or any Free Writing Prospectus or any document incorporated therein by reference
or file any other required document so that, as thereafter delivered (or, to the extent permitted by law, made available) to purchasers of
the Registrable Securities, such Prospectus or Free Writing Prospectus, as the case may be, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they
were made, not misleading; and the Company and the Guarantor shall notify the Participating Holders (in the case of a Shelf Registration
Statement) and the Initial Purchasers and any Participating Broker-Dealers known to the Company (in the case of an Exchange Offer
Registration Statement) to suspend use of the Prospectus or any Free Writing Prospectus as promptly as practicable after the occurrence
of such an event, and such Participating Holders, such Participating Broker-Dealers and the Initial Purchasers, as applicable, hereby agree
to suspend use of the Prospectus or any Free Writing Prospectus, as the case may be, until the Company and the Guarantor have amended
or supplemented the Prospectus or the Free Writing Prospectus, as the case may be, to correct such misstatement or omission;
(xii) a reasonable time prior to the filing of any Registration Statement, any Prospectus, any Free Writing Prospectus, any
amendment to a Registration Statement or amendment or supplement to a Prospectus or a Free Writing Prospectus, provide copies of such
document to the Representatives and their counsel (and, in the case of a Shelf Registration Statement, to the Participating Holders and
their counsel) and make such of the representatives of the Company and the Guarantor as shall be reasonably requested by the
Representatives or their counsel (and, in the case of a Shelf Registration Statement, the Participating Holders or their counsel) available
for discussion of such document; and the Company and the Guarantor shall not, at any time after initial filing of a Registration Statement,
use or file any Prospectus, any Free Writing Prospectus, any amendment of or supplement to a Registration Statement or a Prospectus or
a Free Writing Prospectus, of which the Representatives and their counsel (and, in the case of a Shelf Registration Statement, the
Participating Holders and their counsel) shall not have previously been
advised and furnished a copy or to which the Representatives or their counsel (and, in the case of a Shelf Registration Statement, the
Participating Holders or their counsel) shall reasonably object in writing;
(xiii) obtain a CUSIP number for all Exchange Securities of each series or Registrable Securities of each series, as the case may be,
not later than the initial effective date of a Registration Statement;
(xiv) cause the Indenture to be qualified under the Trust Indenture Act in connection with the registration of the Exchange
Securities or Registrable Securities, as the case may be; cooperate with the Trustee and the Holders to effect such changes to the
Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the Trust Indenture Act; and execute,
and use their commercially reasonable efforts to cause the Trustee to execute, all documents as may be required to effect such changes
and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner;
(xv) in the case of a Shelf Registration, make available for inspection by a representative of the Participating Holders (an “
Inspector ”), any Underwriters participating in any disposition pursuant to such Shelf Registration Statement, one firm of attorneys and
one firm of accountants designated by a majority in aggregate principal amount of the Registrable Securities held by the Participating
Holders and one firm of attorneys and one firm of accountants designated by such Underwriters, at reasonable times and in a reasonable
manner, all pertinent financial and other records, documents and properties of the Company and its subsidiaries reasonably requested by
any such Inspector, Underwriter, attorney or accountant, and cause the respective officers and employees of the Company and the
Guarantor to supply all information reasonably requested by any such Inspector, Underwriter, attorney or accountant in connection with a
Shelf Registration Statement and customary due diligence related to the offering and sale of Registrable Securities thereunder, subject to
such confidentiality agreements as the Company and the Guarantor may reasonably require and to any applicable privilege;
(xvi) in the case of a Shelf Registration, use their commercially reasonable efforts to cause all Registrable Securities covered
thereby to be listed on any securities exchange or any automated quotation system on which similar senior unconvertible debt securities
issued or guaranteed by the Company or the Guarantor are then listed if requested by the Holders of a majority in principal amount of the
Registrable Securities covered by the Shelf Registration Statement, to the extent such Registrable Securities satisfy applicable listing
requirements;
(xvii) if reasonably requested by any Participating Holder, promptly include or incorporate by reference in a prospectus supplement
or post-effective amendment such information with respect to such Participating Holder as such Participating Holder reasonably requests
to be included therein and make all required filings of such prospectus supplement or such post-effective amendment as soon as
reasonably practicable after the Company has received notification of the matters to be so included in such filing; and
(xviii) in the case of a Shelf Registration, enter into such customary agreements and take all such other actions in connection
therewith (including those requested by the Holders of a majority in principal amount of the Registrable Securities covered by the Shelf
Registration Statement) in order to expedite or facilitate the disposition of such Registrable Securities including, but not limited to, an
Underwritten Offering and in such connection, (1) to the extent possible, make such representations and warranties to the Participating
Holders and any Underwriters of such Registrable Securities with respect to the business of the Company and its subsidiaries and the
Registration Statement, Prospectus, any Free Writing Prospectus and documents incorporated by reference or deemed incorporated by
reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings
and consistent with the applicable representations and warranties in the Purchase Agreement and confirm the same if and when requested,
(2) in connection with an Underwritten Offering, obtain opinions of counsel to the Company and the Guarantor (which counsel and
opinions, in form, scope and substance, shall be reasonably satisfactory to the Participating Holders and such Underwriters and their
respective counsel) addressed to each Participating Holder and Underwriter of Registrable Securities, covering the matters customarily
covered in opinions requested in underwritten offerings and consistent with the opinions delivered pursuant to the Purchase Agreement,
(3) in connection with an Underwritten Offering, obtain “comfort” letters from the independent registered public accountants of the
Company and the Guarantor (and, if necessary, any other registered public accountant of any subsidiary of the Company or the
Guarantor, or of any business acquired by the Company or the Guarantor for which financial statements and financial data are or are
required to be included in the Registration Statement) addressed to each Participating Holder (to the extent permitted by applicable
professional standards) and Underwriter of Registrable Securities, such letters to be in customary form and covering matters of the type
customarily covered in “comfort” letters in connection with underwritten offerings, including but not limited to financial information
contained in any preliminary prospectus, Prospectus or Free Writing Prospectus and (4) in connection with an Underwritten Offering,
deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount of the
Registrable Securities being sold or the Underwriters, and which are customarily delivered in underwritten offerings, to evidence the
continued validity of the representations and warranties made pursuant to clause (1) above and to evidence compliance with any
customary conditions contained in an underwriting agreement.
(b) In the case of a Shelf Registration Statement, the Company may require, as a condition to including such Holder’s Registrable
Securities in such Shelf Registration Statement, each Holder of Registrable Securities to furnish to the Company a Notice and Questionnaire
and such other information regarding such Holder and the proposed disposition by such Holder of such Registrable Securities as the Company
and the Guarantor may from time to time reasonably request in writing and require such Holder to agree in writing to be bound by all
provisions of this Agreement applicable to such Holder. Each Holder of Registrable Securities as to which any Shelf Registration is being
effected agrees to furnish promptly to the Company all information required to be disclosed so that the information previously furnished to the
Company by such Holder is not materially misleading and does not omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances under which they were made.
(c) Each Participating Holder agrees that, upon receipt of any notice from the Company and the Guarantor of the happening of any event
of the kind described in Section 3(a)(vi)(2) or Section 3(a)(vi)(4) hereof, such Participating Holder will forthwith discontinue disposition of
Registrable Securities pursuant to the Shelf Registration Statement until such Participating Holder’s receipt of the copies of the supplemented
or amended Prospectus and any Free Writing Prospectus contemplated by Section 3(a)(xi) hereof and, if so directed by the Company and the
Guarantor, such Participating Holder will deliver to the Company and the Guarantor all copies in its possession, other than permanent file
copies then in such Participating Holder’s possession, of the Prospectus and any Free Writing Prospectus covering such Registrable Securities
that is current at the time of receipt of such notice.
(d) If the Company and the Guarantor shall give any notice to suspend the disposition of Registrable Securities pursuant to a Registration
Statement, the Company and the Guarantor shall extend the period during which such Registration Statement shall be maintained effective
pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including
the date when the Holders of such Registrable Securities shall have received copies of the supplemented or amended Prospectus or any Free
Writing Prospectus necessary to resume such dispositions or notice that such amendment or supplement is not necessary.
(e) The Participating Holders who desire to do so may sell such Registrable Securities in an Underwritten Offering. In any such
Underwritten Offering, the investment bank or investment banks and manager or managers (each an “ Underwriter ”) that will administer the
offering will be selected by the Holders of a majority in principal amount of the Registrable Securities included in such offering, subject in each
case to consent by the Company (which shall not be unreasonably withheld or delayed).
(f) No Holder of Registrable Securities may participate in any Underwritten Offering hereunder unless such Holder (a) agrees to sell such
Holder’s Registrable Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other
documents required under the terms of such underwriting arrangements.
4. Participation of Broker-Dealers in Exchange Offer .
(a) The Staff has taken the position that any broker-dealer that receives Exchange Securities for its own account in the Exchange Offer in
exchange for Securities that were acquired by such broker-dealer as a result of market-making or other trading activities (a “ Participating
Broker-Dealer ”) may be deemed to be an “underwriter” within the meaning of the Securities Act and must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such Exchange Securities.
The Company and the Guarantor understand that it is the Staff’s position that if the Prospectus contained in the Exchange Offer
Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating
Broker-Dealers may resell the Exchange Securities, without naming the Participating Broker-Dealers or specifying the amount of Exchange
Securities owned by them, such Prospectus may be delivered by Participating Broker-Dealers (or, to the extent permitted by law, made
available to purchasers) to satisfy their prospectus delivery obligation under the Securities Act in connection with resales of Exchange
Securities for their own accounts, so long as the Prospectus otherwise meets the requirements of the Securities Act.
(b) In light of the above, and notwithstanding the other provisions of this Agreement, the Company and the Guarantor agree to amend or
supplement the Prospectus contained in the Exchange Offer Registration Statement for a period of up to 180 days after the last Exchange Date
(as such period may be extended pursuant to Section 3(d) hereof), if requested by one or more Participating Broker-Dealers, in order to
expedite or facilitate the disposition of any Exchange Securities by Participating Broker-Dealers consistent with the positions of the Staff
recited in Section 4(a) above. The Company and the Guarantor further agree that Participating Broker-Dealers shall be authorized to deliver
such Prospectus (or, to the extent permitted by law, make available) during such period in connection with the resales contemplated by this
Section 4.
(c) The Initial Purchasers shall have no liability to the Company, the Guarantor or any Holder with respect to any request that they may
make pursuant to Section 4(b) hereof.
5. Indemnification and Contribution .
(a) The Company agrees to indemnify and hold harmless each Initial Purchaser and each Holder, their respective affiliates, directors and
officers and each Person, if any, who controls any Initial Purchaser or any Holder within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims, damages or liabilities (including, without limitation, legal fees and
other expenses reasonably incurred in connection with defending or investigating any suit, action, proceeding or any claim asserted, as such
fees and expenses are incurred), joint or several, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon (1) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or any
omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein
not misleading, or (2) any untrue statement or alleged untrue statement of a material fact contained in any Prospectus, any Free Writing
Prospectus or any “issuer information” (“ Issuer Information ”) filed or required to be filed pursuant to Rule 433(d) under the Securities Act, or
any omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in each case except insofar as such losses, claims, damages or liabilities arise out
of, or are based upon, any untrue statement or omission or alleged untrue statement or omission in any such document in reliance upon and in
conformity with any information relating to any Initial Purchaser or information relating to any selling Holder furnished to the Company in
writing through the Representatives or any Holder respectively, expressly for use therein. In connection with any Underwritten Offering
permitted
by Section 3, the Company will also indemnify the Underwriters, if any, selling brokers, dealers and similar securities industry professionals
participating in the distribution, their respective affiliates and each Person who controls such Persons (within the meaning of the Securities Act
and the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders, if requested in writing in
advance by a selling Holder in connection with any Registration Statement, any Prospectus, any Free Writing Prospectus or any Issuer
Information.
(b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Guarantor, the Initial Purchasers and
the other selling Holders, the directors of the Company and the Guarantor, each officer of the Company and the Guarantor who signed the
Registration Statement, and each Person, if any, who controls the Company, the Guarantor, any Initial Purchaser and any other selling Holder
within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the indemnity set forth in
paragraph (a) above, but only with respect to any losses, claims, damages or liabilities that arise out of, or are based upon, any untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to such Holder
furnished to the Company in writing by such Holder expressly for use in any Registration Statement, any Prospectus and any Free Writing
Prospectus.
(c) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be instituted involving
any Person in respect of which indemnification may be sought pursuant to either paragraph (a) or (b) above, such Person (the “ Indemnified
Person ”) shall promptly notify the Person against whom such indemnification may be sought (the “ Indemnifying Person ”) in writing;
provided that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have under paragraph (a) or
(b) above except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure and
that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have to an Indemnified Person otherwise than
under paragraph (a) or (b) above. If any such suit, action, proceeding (including any governmental or regulatory investigation), claim or
demand shall be instituted involving any Indemnified Person and it shall have notified the Indemnifying Persons thereof, upon request of the
Indemnified Person, the Indemnifying Person shall retain counsel reasonably satisfactory to the Indemnified Person to represent the
Indemnified Person and any others entitled to indemnification pursuant to this Section 5 that the Indemnifying Person may designate in such
proceeding and shall pay the reasonable fees and expenses of such counsel related to such proceeding, as incurred. In any such proceeding, any
Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such
Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary; (ii) the
Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person; (iii) the
Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to
those available to the Indemnifying Person; or (iv) the named parties to any such proceeding (including any impleaded parties) include both the
Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual
or potential differing interests between them. It is understood and agreed that the Indemnifying Person shall not, in respect of the legal expenses
of any indemnified party in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons,
and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm (x) for any Initial Purchaser, its affiliates,
directors and officers and any control Persons of such Initial Purchaser shall be designated in writing by Citigroup, Credit Suisse, J.P. Morgan
and RBS, (y) for any Holder, its directors and officers and any control Persons of such Holder shall be designated in writing by the Majority
Holders and (z) in all other cases shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement
of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the
Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or
judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested that an Indemnifying Person
reimburse the Indemnified Person for fees and expenses of counsel as contemplated by this paragraph, the Indemnifying Person shall be liable
for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by
the Indemnifying Person of such request and (ii) the Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with
such request prior to the date of such settlement. No Indemnifying Person shall, without the written consent of the Indemnified Person, effect
any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and
indemnification could have been sought hereunder by such Indemnified Person, unless such settlement (A) includes an unconditional release of
such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (B) does not include a statement as to or
an admission of fault, culpability or failure to act by or on behalf of any Indemnified Person.
(d) If the indemnification provided for in paragraphs (a) and (b) above is unavailable to an Indemnified Person or insufficient in respect
of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying
such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantor
from the offering of the Securities and the Exchange Securities, on the one hand, and by the Holders from receiving Securities or Exchange
Securities registered under the Securities Act, on the other hand, or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the
Company and the Guarantor on the one hand and the Holders on the other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the
Guarantor on the one hand and the Holders on the other shall be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company
and the Guarantor or by the Holders and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(e) The Company, the Guarantor and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 5
were determined by pro rata allocation (even
if the Holders were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable
considerations referred to in paragraph (d) above. The amount paid or payable by an Indemnified Person as a result of the losses, claims,
damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 5, in no event shall a Holder be required to contribute any amount in excess of the amount by
which the total price at which the Securities or Exchange Securities sold by such Holder exceeds the amount of any damages that such Holder
has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who
was not guilty of such fraudulent misrepresentation. The Holders’ obligations to contribute pursuant to this Section 5 are several and not joint.
(f) The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies that may otherwise be available
to any Indemnified Person at law or in equity.
(g) The indemnity and contribution provisions contained in this Section 5 shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Initial Purchasers or any Holder or any Person
controlling any Initial Purchaser or any Holder, or by or on behalf of the Company or the Guarantor or the officers or directors of or any Person
controlling the Company or the Guarantor, (iii) acceptance of any of the Exchange Securities and (iv) any sale of Registrable Securities
pursuant to a Shelf Registration Statement.
6. General.
(a) No Inconsistent Agreements. The Company and the Guarantor represent, warrant and agree that (i) the rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of any other outstanding securities
issued or guaranteed by the Company or the Guarantor under any other agreement and (ii) neither the Company nor the Guarantor has entered
into, or on or after the date of this Agreement will enter into, any agreement that is inconsistent with the rights granted to the Holders of
Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof.
(b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified
or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company and the Guarantor
have obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities
affected by such amendment, modification, supplement, waiver or consent; provided that no amendment, modification, supplement, waiver or
consent to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Securities unless
consented to in writing by such Holder. Any amendments, modifications, supplements, waivers or consents pursuant to this Section 6(b) shall
be by a writing executed by each of the parties hereto. Each Holder of
Registrable Securities outstanding at the time of any such amendment, modification, supplement, waiver or consent thereafter shall be bound
by any such amendment, modification, supplement, waiver or consent effected pursuant to this Section 6(b), whether or not any notice, writing
or marking indicating such amendment, modification, supplement, waiver or consent appears on the Registrable Securities or is delivered to
such Holder. Each Holder may waive compliance with respect to any obligation of the Company or the Guarantor under this Agreement as it
may apply or be enforced by such particular Holder.
(c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such
Holder to the Company by means of a notice given in accordance with the provisions of this Section 6(c), which address initially is, with
respect to the Initial Purchasers, the address set forth in the Purchase Agreement; (ii) if to the Company and the Guarantor, initially at the
applicable address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the
provisions of this Section 6(c); and (iii) to such other persons at their respective addresses as provided in the Purchase Agreement and
thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c). All such notices and
communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three Business Days after
being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely
delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently
delivered by the Person giving the same to the Trustee, at the address specified in the Indenture.
(d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of
each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing
herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase
Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities in any manner, whether by operation of law or
otherwise, such Registrable Securities shall be held subject to all the terms of this Agreement, and by taking and holding such Registrable
Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this
Agreement and such Person shall be entitled to receive the benefits hereof. The Initial Purchasers (in their capacity as Initial Purchasers) shall
have no liability or obligation to the Company or the Guarantor with respect to any failure by a Holder to comply with, or any breach by any
Holder of, any of the obligations of such Holder under this Agreement.
(e) Third Party Beneficiaries. Each Holder shall be a third party beneficiary to the agreements made hereunder between the Company and
the Guarantor, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the
extent it deems such enforcement necessary or advisable to protect its rights or the rights of other Holders hereunder.
(f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of reference only, are not a part of this Agreement and shall not limit
or otherwise affect the meaning hereof.
(h) Governing Law. This Agreement, and any claim, controversy or dispute arising under or related to this Agreement, shall be governed
by and construed in accordance with the laws of the State of New York, without giving effect to applicable principles of conflicts of laws to the
extent the laws of another jurisdiction would be required thereby.
(i) Entire Agreement; Severability. This Agreement contains the entire agreement between the parties relating to the subject matter hereof
and supersedes all oral statements and prior writings with respect thereto. If any term, provision, covenant or restriction contained in this
Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable or against public policy, the remainder of the terms,
provisions, covenants and restrictions contained herein shall remain in full force and effect and shall in no way be affected, impaired or
invalidated. The Company, the Guarantor and the Initial Purchasers shall endeavor in good faith negotiations to replace the invalid, void or
unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, void or
unenforceable provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
PHILLIPS 66
By: /s/ Frances M. Vallejo
Name: Frances M. Vallejo
Title: Vice President and Treasurer
PHILLIPS 66 COMPANY
By: /s/ Frances M. Vallejo
Name: Frances M. Vallejo
Title: Vice President and Treasurer
Confirmed and accepted as of the date first above written:
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
J.P. Morgan Securities LLC
RBS Securities Inc.
For themselves and on behalf of the
several Initial Purchasers
BY: CITIGROUP GLOBAL MARKETS INC.
by:
/s/ Brian Bednarjri
Name: Brian Bednarjri
Title: Managing Director
BY: CREDIT SUISSE SECURITIES (USA) LLC
by:
/s/ Michael Kim
Name: Michael Kim
Title: Director
JBY: J.P. MORGAN SECURITIES LLC
by:
/s/ Stephen L. Sheiner
Name: Stephen L. Sheiner
Title: Executive Director
BY: RBS SECURITIES INC.
by:
/s/ Mark Frenzel
Name: Mark Frenzel
Title: Director
Table of Contents
Exhibit 99.1
(Subject to Completion, Dated April 5, 2012)
[  ], 2012
Dear ConocoPhillips Stockholder:
I am pleased to report that the previously announced repositioning of ConocoPhillips through the separation of ConocoPhillips’ Phillips 66
subsidiary from our remaining businesses is expected to become effective on April 30, 2012, on which date Phillips 66, a Delaware
corporation, will become an independent public company and will hold, through its subsidiaries, the assets and liabilities associated with
ConocoPhillips’ Downstream business.
The separation will be completed by way of a pro rata distribution of all of the outstanding shares of Phillips 66 common stock to our
stockholders of record as of 5:00 p.m. Eastern Time, on April 16, 2012, the distribution record date. Each ConocoPhillips stockholder of record
will receive one share of Phillips 66 common stock for every two shares of ConocoPhillips common stock held by such stockholder on the
record date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be issued.
Following the distribution, stockholders may request that their shares of Phillips 66 common stock be transferred to a brokerage or other
account at any time. No fractional shares of Phillips 66 common stock will be issued. The distribution agent will aggregate fractional shares
into whole shares, sell the whole shares in the open market at prevailing prices and distribute the net cash from proceeds from the sales pro rata
to each holder who would otherwise have been entitled to receive a fractional share in the distribution.
ConocoPhillips has received a private letter ruling from the Internal Revenue Service to the effect that, among other things, the distribution of
Phillips 66’s common stock to ConocoPhillips stockholders, together with certain related transactions, will qualify as a transaction that is
generally tax-free for U.S. federal income tax purposes. However, any cash that you receive in lieu of fractional shares generally will be taxable
to you. You should consult your own tax advisor as to the particular tax consequences of the distribution to you, including potential tax
consequences under state, local and non-U.S. tax laws. The separation is also subject to other conditions, including necessary regulatory
approvals.
The distribution does not require stockholder approval, nor do you need to take any action to receive your shares of Phillips 66 common stock.
ConocoPhillips’ common stock will continue to trade on the New York Stock Exchange under the ticker symbol “COP.” Phillips 66’s common
stock will trade on the New York Stock Exchange under the ticker symbol “PSX.”
The enclosed information statement, which we are mailing to all ConocoPhillips stockholders, describes the separation in detail and contains
important information about Phillips 66, including its historical combined financial statements. We urge you to read this information statement
carefully.
We want to thank you for your continued support of ConocoPhillips.
Sincerely,
J. J. Mulva
Chairman of the Board, President and
Chief Executive Officer
Table of Contents
[  ], 2012
Dear Future Phillips 66 Stockholder:
It is our pleasure to welcome you as a future stockholder of Phillips 66. While we will be a new company upon our separation from
ConocoPhillips, our businesses have a strong history of financial and operating performance. Following the separation, we will be a uniquely
integrated downstream company, with operations encompassing natural gas gathering and processing, crude oil refining, petroleum products
marketing, transportation, power generation, and petrochemicals manufacturing and marketing.
Given our leading position in these industries, we will have the opportunity to expand the use of our financial, technical and commercial
capabilities to create value. Cash flows from operating activities are expected to be more than adequate to fund capital spending and dividend
payments, allowing us to strengthen our balance sheet and build financial flexibility. We will continue to use our disciplined approach to
capital spending, with the goal of having the highest returns in each of the industries in which we compete. Growth in earnings and free cash
flow is expected through future investment in high-return projects. Our goal is to share our growth in cash flow with our stockholders through
annual increases in dividends.
Our business strategy focuses on generating value through: (1) delivering profitable growth; (2) enhancing returns on capital; (3) maintaining
financial strength; and (4) providing strong shareholder distributions. We are confident that we have the quality of assets and management to
execute these strategic objectives.
Our common stock will trade on the New York Stock Exchange under the ticker symbol “PSX.”
Our management team is excited about the opportunities ahead of us, and is committed to unlocking the potential of Phillips 66. We invite you
to learn more about our company and our plans by reading the enclosed material and look forward to updating you on our progress.
Sincerely,
Greg C. Garland
President
Phillips 66
Table of Contents
Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to
these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended.
Preliminary Information Statement
(Subject to Completion, Dated April 5, 2012)
Information Statement
Phillips 66
Common Stock
ConocoPhillips is furnishing this Information Statement in connection with the distribution to ConocoPhillips stockholders of all of the
common stock of Phillips 66 owned by ConocoPhillips, which will be 100 percent of such common stock outstanding immediately prior to the
distribution. Phillips 66 currently is a wholly owned subsidiary of ConocoPhillips that at the time of the distribution will hold, through its
subsidiaries, the assets and liabilities associated with ConocoPhillips’ Downstream business.
To implement the distribution, ConocoPhillips will distribute the shares of Phillips 66 common stock on a pro rata basis to the holders of
ConocoPhillips common stock. Each holder of ConocoPhillips common stock will receive one share of common stock of Phillips 66 for every
two shares of ConocoPhillips common stock held at 5:00 p.m. Eastern Time on April 16, 2012, the record date for the distribution.
The distribution is expected to occur after the New York Stock Exchange (NYSE) market closing on April 30, 2012. Immediately after
ConocoPhillips completes the distribution, Phillips 66 will be an independent, publicly traded company. We expect that, for U.S. federal
income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, upon your receipt of shares of
Phillips 66 common stock in the distribution, except with respect to any cash received in lieu of fractional shares.
No vote of ConocoPhillips stockholders is required in connection with this distribution. ConocoPhillips stockholders will not be required to pay
any consideration for the shares of Phillips 66 common stock they receive in the distribution, and they will not be required to surrender or
exchange shares of their ConocoPhillips common stock or take any other action in connection with the distribution.
As ConocoPhillips owns all of the outstanding shares of Phillips 66’s common stock, there currently is no public trading market for Phillips 66
common stock. Phillips 66’s common stock has been approved for listing on the NYSE under the ticker symbol “PSX.” We anticipate that a
limited market, commonly known as a “when-issued” trading market, for Phillips 66’s common stock will develop on or shortly before the
record date for the distribution and will continue up to and including the distribution date. We expect the “regular-way” trading of Phillips 66’s
common stock will begin on the first trading day following the distribution date.
In reviewing this Information Statement, you should carefully consider the matters described in “Risk Factors” beginning on page 19
of this Information Statement.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities
or determined whether this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.
This Information Statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.
The date of this Information Statement is April [  ], 2012.
ConocoPhillips first mailed this Information Statement to ConocoPhillips stockholders on or about April [  ], 2012.
Table of Contents
TABLE OF CONTENTS
Summary
Our Business
Our Business Strategies
Our Competitive Strengths
The Separation
Questions and Answers about the Separation and Distribution
Summary of the Separation and Distribution
Summary Risk Factors
Page
1
1
2
3
5
7
13
16
Selected Combined Financial Data of Phillips 66
Risk Factors
Risks Relating to the Separation
Risks Relating to Our Industry and Our Business
Risks Relating to Ownership of Our Common Stock
18
19
19
24
29
Cautionary Statement Regarding Forward-Looking Statements
32
The Separation
General
Reasons for the Separation
The Number of Shares You Will Receive
Treatment of Fractional Shares
When and How You Will Receive the Distribution of Phillips 66 Shares
Treatment of Equity-Based Compensation
Treatment of 401(k) Shares
Results of the Distribution
Incurrence of Debt
Material U.S. Federal Income Tax Consequences of the Distribution
Market for Common Stock
Trading Between Record Date and Distribution Date
Conditions to the Distribution
Reason for Furnishing this Information Statement
34
34
34
35
35
35
36
36
37
37
37
40
40
41
42
Dividend Policy
Capitalization
Business and Properties
Overview
Our Business Strategies
Our Competitive Strengths
Segment and Geographic Information
Technology Development
Competition
General
Legal Proceedings
43
44
45
45
45
47
48
62
62
63
63
Management
Executive Officers Following the Distribution
65
65
Directors
Composition of the Board of Directors
Qualification of Directors
Board of Directors Following the Distribution
66
66
66
66
i
Table of Contents
Additional Directors
Committees of the Board of Directors
Nominating Process of the Nominating and Governance Committee
Decision-Making Process to Determine Director Compensation
Board Risk Oversight
Communications with the Board of Directors
Page
67
68
69
70
70
70
Compensation Discussion and Analysis
Executive Compensation
Non-Employee Director Compensation
Stock Ownership
Certain Relationships and Related Transactions
The Separation from ConocoPhillips
Related Party Transactions
Agreements with ConocoPhillips
Description of Capital Stock
Where You Can Find More Information
Unaudited Pro Forma Condensed Combined Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Results of Operations
Capital Resources and Liquidity
Critical Accounting Estimates
71
86
109
111
113
113
113
113
117
122
123
129
129
132
139
149
Quantitative and Qualitative Disclosures About Market Risk
Index to Financial Statements
152
F-1
ii
Table of Contents
NOTE REGARDING THE USE OF CERTAIN TERMS
We use the following terms to refer to the items indicated:
•
“We,” “us,” “our” and “company,” unless the context requires otherwise, refer to Phillips 66, the entity that at the time of the
distribution will hold, through its subsidiaries, the assets and liabilities associated with ConocoPhillips’ Downstream business, and
whose shares ConocoPhillips will distribute in the separation. ConocoPhillips’ Downstream business includes its refining, marketing
and transportation operations, including power generation, its natural gas gathering, processing, transmission and marketing
operations (primarily conducted through its equity investment in DCP Midstream, LLC), and its petrochemical operations
(conducted through its equity investment in Chevron Phillips Chemical Company LLC). Where appropriate in context, the foregoing
terms also include the subsidiaries of this entity.
•
The term “distribution” refers to the distribution of all of the shares of Phillips 66 common stock owned by ConocoPhillips to
stockholders of ConocoPhillips as of the record date.
•
The term “separation” refers to the separation of the Downstream business from ConocoPhillips and the creation of an independent,
publicly traded company, Phillips 66, holding the Downstream business through the distribution.
•
The term “distribution date” means the date on which the distribution occurs.
iii
Table of Contents
SUMMARY
This summary highlights selected information from this Information Statement relating to Phillips 66, Phillips 66’s separation from
ConocoPhillips and the distribution of Phillips 66 common stock by ConocoPhillips to its stockholders. For a more complete
understanding of our businesses and the separation and distribution, you should read the entire Information Statement carefully,
particularly the discussion set forth under “Risk Factors” beginning on page 19 of this Information Statement, and our audited historical
combined financial statements, our unaudited pro forma condensed combined financial statements and the respective notes to those
statements appearing elsewhere in this Information Statement.
Except as otherwise indicated or unless the context otherwise requires, the information included in this Information Statement, including
the combined financial statements of Phillips 66, assumes the completion of all the transactions referred to in this Information Statement in
connection with the separation and distribution.
Our Business
Following our separation from ConocoPhillips, we believe we will have a unique approach to downstream integration through our
combination as a leading refiner with significant marketing and transportation assets, one of the largest domestic producers of natural gas
liquids (NGL), and one of the world’s top producers of petrochemicals. Including our equity affiliates, our operations encompass
15 refineries with a gross crude oil capacity of 2.8 million barrels per day, 10,000 branded marketing outlets, nearly 80,000 miles of
pipeline, 7.2 billion cubic feet per day of gross natural gas processing capacity, and over 40 billion pounds of gross annual chemicals
processing capacity. We believe this positions Phillips 66 to compete with the best in the industries across the value chain.
Phillips 66 has the following businesses, which we refer to collectively as the Downstream business:
•
The Refining and Marketing (R&M) segment purchases, refines, markets and transports crude oil and petroleum products,
mainly in the United States, Europe and Asia, and also engages in power generation activities.
•
The Midstream segment gathers, processes, transports and markets natural gas, and fractionates and markets NGL,
predominantly in the United States. The Midstream segment primarily consists of our 50 percent equity investment in DCP
Midstream, LLC (DCP Midstream), a joint venture with Spectra Energy Corp.
•
The Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment
consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC (CPChem), a joint venture with
Chevron Corporation.
Phillips 66 was formed in 2011 and will, at the time of the distribution, hold the assets and liabilities of ConocoPhillips’ Downstream
business. Phillips 66’s headquarters will be located in Houston, Texas and its general telephone number is 281-293-6600. Our Internet
website is http://www.Phillips66.com. Our website and the information contained on that site, or connected to that site, are not
incorporated by reference into this Information Statement.
Elsewhere in this Information Statement we provide a more detailed description of the Downstream business that will be separated from
ConocoPhillips’ other businesses. Following the separation, Phillips 66 will be an independent, publicly traded company. ConocoPhillips
will not retain any ownership interest in
1
Table of Contents
Phillips 66. In connection with the separation, ConocoPhillips and Phillips 66 will enter into a number of agreements that will govern the
relationship between ConocoPhillips and Phillips 66 following the distribution.
Our business is subject to various risks. For a description of these risks, see “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this Information Statement.
Our Business Strategies
Deliver Profitable Growth
We believe all three of our business segments have profitable growth opportunities. The use of free cash flow for investments to improve
R&M margins and expand Chemicals and Midstream capacity has the potential to deliver significant growth in earnings and returns.
In R&M, we have identified projects designed to reduce feedstock costs and improve clean product yield, which should expand gross profit
margins and return on capital employed (ROCE). An example is the coker and refinery expansion (CORE) project at the Wood River
Refinery. This project increased heavy crude oil processing capacity, while delivering a 5 percent improvement in clean product yield.
Additionally, on an ongoing basis, we evaluate and execute R&M projects designed to improve operating efficiency.
We expect to have significant growth opportunities related to expanding North American natural gas and NGL production. For example, as
unconventional natural gas production grows, opportunities are created for DCP Midstream to invest in new pipelines, natural gas
processing plants and gathering systems. In our chemicals business, we see ways to exploit low NGL feedstock costs. In March 2011,
CPChem announced plans to evaluate the construction of a world-scale ethane cracker and derivatives facility on the U.S. Gulf Coast.
Internationally, CPChem is seeking to identify new petrochemical facility investment opportunities in the Middle East and Asia.
Enhance Returns on Capital
We believe ROCE is an important metric for evaluating the quality of capital allocation decisions, and it provides a good measure of
portfolio value. ROCE is a measure of a company’s efficiency and profitability of its capital investments. ROCE is a ratio, the numerator
of which is net income plus after-tax interest expense, and the denominator is average total equity plus total debt. We will seek to increase
ROCE through a combination of portfolio optimization, investing in higher-return projects, and continuing cost discipline. Absolute ROCE
improvement, as well as improvement relative to our peers, is expected to be a key performance metric as we move forward.
Of the three business segments within Phillips 66, R&M has the highest capital employed and lowest ROCE, and thus requires further
rationalization to improve returns. We continue to evaluate opportunities to reduce refining exposure in markets where we expect to
generate below-average returns over the medium-to-longer term because of low market crack spreads. For example, we recently sold the
Wilhelmshaven Refinery in Germany and have idled and intend to sell or permanently close the Trainer Refinery in Pennsylvania. In
addition to portfolio rationalization of low-returning refining assets, we plan to improve R&M ROCE through a disciplined capital
allocation process.
Conversely, we expect to increase capital investments and capital employed in more profitable and higher-returning projects in our
Chemicals and Midstream segments.
2
Table of Contents
An important aspect to increasing ROCE is continued discipline in cost management. We plan to remain focused on costs, through internal
efficiency efforts, coupled with ongoing procurement initiatives with providers of goods and services. Cost control is a key aspect of our
performance evaluation and tracking.
Maintain Financial Strength
A strong balance sheet and financial flexibility are important attributes in our industry. At the time of our separation, we expect to hold an
investment-grade credit rating on our senior unsecured long-term debt and maintain sufficient cash and liquidity to allow us to invest in
high-return projects. Available cash flow in excess of capital spending and dividends can be directed toward the retirement of debt in order
to achieve and maintain a targeted debt-to-capital ratio of 20 percent to 30 percent.
Strong Stockholder Distributions
We believe a significant portion of value creation can be generated through consistent growth in regular dividends and share repurchases.
Distributions to shareholders also reinforce the focus on capital discipline by Phillips 66 management. We currently plan to pay quarterly
cash dividends at an initial rate of $0.20 per share and, subject to market conditions and other factors, increase these dividends annually at
the discretion of our Board of Directors. In addition, share repurchases will be considered after capital, dividend and debt reduction
objectives are met.
Our Competitive Strengths
A Strong Safety and Environmental Stewardship Culture
We believe a workforce committed to continuous improvement in safety and environmental stewardship is a fundamental requirement for
our employees, our company, and the communities in which we operate. We employ rigorous training and audit programs to drive ongoing
improvement in both personal and process safety as we strive for zero incidents. We are committed to protecting the environment and
continually seek to reduce our environmental footprint throughout our operations. For example, we reduced the sulfur dioxide emission
from our refineries by 58 percent during the three-year period ended December 31, 2010, while our nitrogen oxides emissions were
reduced 27 percent over the same period.
A Unique Approach to Downstream Integration
Our combination as a leading refiner with significant marketing and transportation assets, one of the largest domestic producers of NGL,
and one of the world’s top producers of petrochemicals creates a unique approach to downstream integration through earnings
diversification. Our businesses have the efficiency of scale and technical capability to compete in the most attractive markets globally.
Including our equity affiliates, our operations encompass 15 refineries with a gross crude oil capacity of 2.8 million barrels per day, 10,000
branded marketing outlets, nearly 80,000 miles of pipeline, 7.2 billion cubic feet per day of gross natural gas processing capacity, and over
40 billion pounds of gross annual chemicals processing capacity. We believe this positions Phillips 66 to compete with the best in the
industries across the value chain.
Geographically Diverse Refining Assets
Our 11 operated U.S. refineries are located across all five Petroleum Administration for Defense Districts (PADDs). This regional diversity
enables us to participate in market opportunities as they occur in every U.S. geographic region. The level of transportation, marketing and
commercial integration varies in each PADD, depending on need, and provides our refineries with dependable supply of crude oil from
domestic, Canadian and other international sources. We have nearly 500,000 barrels per day of net refining capacity in four refineries in
the Midcontinent region, where we currently benefit from strong margins because of low feedstock costs due to increasing onshore crude
oil production. Internationally, we own or hold interests in three refineries in Europe and one in Asia. These include our 100
percent-owned Humber Refinery in the
3
Table of Contents
United Kingdom, one of the most sophisticated refining assets in Europe. Humber is a fully integrated facility that produces a high portion
of transportation fuels, such as gasoline and diesel fuel. Our Immingham Combined Heat and Power Plant in the United Kingdom provides
steam and electricity to the Humber Refinery, as well as merchant power into the U.K. market.
Ability to Process a Variety of Crude Oil Types While Maintaining High Yields
Extensive transportation and logistics assets and commercial capabilities support our refineries, allowing the delivery of crude oil feedstock
from multiple domestic, Canadian and international sources of supply. Our refineries can process a wide range of crude oils, including
lower-priced heavy and sour crudes. Clean product yield is the percentage of higher-margin products (such as gasoline, distillate,
aromatics, lubricants and chemical feedstocks) produced from processed crude oil and other purchased raw materials. In 2011, our
refineries delivered clean product yields of 84 percent, a 1 percent improvement over 2010. Our commercial capabilities include supply
and trading operations experienced in sourcing crude and marketing refined products globally.
Low-Cost Marketing Operations
Our global marketing strategy is to provide sustainable, low-cost and ratable demand for our refining network’s products. In the United
States, we supply gasoline, diesel fuel and aviation fuel to approximately 8,250 marketer-owned or -supplied outlets in 49 states under
three domestic brands— Phillips 66 , Conoco and 76 . This strong branded wholesale business is supported by long-term supply
agreements with marketers. In Europe, we hold a niche marketing position through our ability to leverage our JET brand and provide a
low-cost, well-established infrastructure. This network allows us to deliver a very competitive gasoline and diesel fuel brand with a
premier retail offering.
Extensive Transportation Assets
Our domestic transportation business includes 15,000 miles of pipelines under management, including crude oil, petroleum product and
NGL pipelines; 42 finished product terminals, 8 liquefied petroleum gas terminals, 5 crude oil terminals, and 1 coke exporting facility; an
extensive fleet of marine and inland vessels under charter; and truck and rail assets. This transportation business supports our refining
system and efforts to optimize refined product distribution, resulting in economies of scale that contribute to profitability.
DCP—A High-Growth Midstream Business
We conduct our midstream business primarily through a 50 percent equity investment in DCP Midstream. DCP Midstream is a leader in its
sector as one of the largest natural gas gatherers and processors, NGL producers, and NGL marketers in the United States. DCP
Midstream’s extensive asset base is located in many of the legacy natural gas producing regions of the United States, including the Rocky
Mountains, Midcontinent, Permian, East Texas/North Louisiana, South Texas, Central Texas and the Gulf Coast. In addition, DCP
Midstream is entering high-growth regions of the United States, including the Niobrara, Eagle Ford shale, Barnett shale, and Granite Wash
regions, allowing for substantial growth opportunities. DCP Midstream’s assets include 62,000 miles of pipelines, 61 gas processing plants
and 12 NGL fractionators. In 2010, DCP Midstream signed agreements that will enable it to become the anchor shipper of growing Eagle
Ford shale gas production on a portion of the Trunkline Gas pipeline system. DCP Midstream is also planning construction of the Sand
Hills Pipeline to provide NGL transportation capacity for producers in the Permian and Eagle Ford basins to gain access to market centers
along the Gulf Coast.
CPChem—A High-Returning Petrochemicals Company
We conduct our chemicals business through a 50 percent equity investment in CPChem. CPChem has a number of large petrochemical
facilities in the U.S. Gulf Coast region, and has significant international operations through its investments in feedstock-advantaged areas
in the Middle East, with access to large,
4
Table of Contents
growing markets for its products, such as Asia. CPChem is one of the world’s top producers of olefins and polyolefins and a leading
supplier of aromatics and styrenics. Our investment in CPChem has generated high returns in recent years, with a 2010 ROCE of 21
percent and a 2011 ROCE of 28 percent. CPChem is analyzing a number of additional growth projects globally, including proposed
construction of a world-scale ethane cracker and two polyethylene facilities at or near one or more of CPChem’s Texas Gulf Coast sites.
With an expected annual capacity of 3.3 billion pounds, the ethane cracker would, if progressed, increase CPChem’s U.S. ethylene
capacity by over 40 percent and allow CPChem to leverage the development of significant shale gas resources in the United States.
The Separation
Overview
On April 4, 2012, the Board of Directors of ConocoPhillips approved the distribution to ConocoPhillips stockholders of all the shares of
common stock of Phillips 66. Phillips 66 is a wholly owned subsidiary of ConocoPhillips that at the time of the distribution will hold,
through its subsidiaries, the assets and liabilities associated with ConocoPhillips’ Downstream business. Immediately following the
distribution, ConocoPhillips stockholders as of the record date will own 100 percent of the outstanding shares of common stock of
Phillips 66.
Before Phillips 66’s separation from ConocoPhillips, Phillips 66 and ConocoPhillips will enter into a Separation and Distribution
Agreement and several other agreements to effect the separation and distribution. These agreements will provide for the allocation between
Phillips 66 and ConocoPhillips of ConocoPhillips’ assets, liabilities and obligations and will govern the relationship between Phillips 66
and ConocoPhillips after the separation (including with respect to employee matters, tax matters and intellectual property matters).
Phillips 66 and ConocoPhillips will also enter into a Transition Services Agreement and several commercial agreements which will provide
for, among other things, the provision of transitional services, utility cost allocation, delivery system maintenance for certain premises, and
ongoing commodity supply arrangements.
The ConocoPhillips Board of Directors believes that separating the Downstream business from ConocoPhillips’ other businesses through
the distribution is in the best interests of ConocoPhillips and its stockholders and has concluded the separation will provide each company
with a number of material opportunities and benefits, including the following:
•
Strategic Focus . Position each company to pursue a more focused strategy, with ConocoPhillips well-positioned for organic
growth through ongoing strategic initiatives in the upstream sector, and Phillips 66 well-positioned to pursue value creation
strategies in the downstream sector with greater flexibility as a result of being an independent and dedicated downstream
company.
•
Management Focus . Allow management of each company to concentrate that company’s resources wholly on its particular
market segments, customers and core businesses, with greater ability to anticipate and respond faster to changing markets and
new opportunities. Operationally, both companies will be positioned as leaders in their segments, with sufficient size to manage
risks and anticipate and respond to opportunities. Each company will be able to focus on its core operations, with greater
management focus on customized strategies that can deliver long-term shareholder value.
•
Recruiting and Retaining Employees . Allow each company to recruit and retain employees with expertise directly applicable to
its needs and under compensation policies that are appropriate for
5
Table of Contents
its specific lines of business. In particular, following the distribution, the value of equity-based incentive compensation
arrangements offered by each company should be more closely aligned with the performance of its businesses. Such
equity-based compensation arrangements should provide enhanced incentives for employee performance and improve the ability
of each company to attract, retain and motivate qualified personnel at all levels of the organization, including those key
employees considered essential to that company’s future success.
•
Access to Capital and Capital Structure . Eliminate competition for capital between the two business lines. Instead, both
companies will have direct access to the debt and equity capital markets to fund their respective growth strategies and to
establish a capital structure and dividend policy appropriate for their business needs. In addition, the separation will result in
separately traded stocks reflecting a pure-play upstream company and an integrated downstream company that will facilitate
each company’s growth strategy.
•
Investor Choice . Provide investors with a more targeted investment opportunity in each company that offers different
investment and business characteristics, including different opportunities for growth, capital structure, business models and
financial returns. This will allow investors to evaluate the separate and distinct merits, performance and future prospects of each
company.
The distribution of our common stock as described in this Information Statement is subject to the satisfaction or waiver of certain
conditions. For more information, see “The Separation—Conditions to the Distribution” and “Risk Factors—Risks Relating to the
Separation” included elsewhere in this Information Statement.
6
Table of Contents
Questions and Answers About the Separation and Distribution
Q:
Why is ConocoPhillips separating the Downstream
business?
A:
ConocoPhillips’ Board of Directors and management
believe separating the Downstream business will have
the following benefits: it will enable each company to
pursue a more focused strategy; it will enable the
management of each company to concentrate that
company’s resources wholly on its particular market
segments, customers and core businesses, with greater
ability to anticipate and respond faster to changing
markets and opportunities; it will allow each company to
recruit and retain employees with expertise directly
applicable to its needs; it will eliminate competition for
capital between the two business lines; and it will
provide investors in each company with a more targeted
investment opportunity.
Q:
How will ConocoPhillips accomplish the separation of
Phillips 66?
A:
The separation involves ConocoPhillips’ distribution to
its stockholders of all the shares of our common stock.
Following the distribution, we will be a publicly traded
company independent from ConocoPhillips, and
ConocoPhillips will not retain any ownership interest in
our company.
Q:
What will I receive in the distribution?
A:
ConocoPhillips will distribute one share of Phillips 66
common stock for every two shares of ConocoPhillips
common stock outstanding as of the record date. You
will pay no consideration nor give up any portion of your
ConocoPhillips common stock to receive shares of our
common stock in the distribution.
Q:
What is the record date for the distribution, and
when will the distribution occur?
A:
The record date is April 16, 2012, and ownership will be
determined as of 5:00 p.m., Eastern Time, on that date.
When we refer to the “record date,” we are referring to
that time and date. ConocoPhillips will distribute shares
of Phillips 66 common stock on April 30, 2012, which
we refer to as the distribution date.
Q:
As a holder of shares of ConocoPhillips common
stock as of the record date, what do I have to do to
participate in the distribution?
A:
Nothing. Stockholders of ConocoPhillips common stock
on the record date are not required to pay any cash or
deliver any other consideration, including any shares of
ConocoPhillips common stock, for the shares of our
common stock to be distributed to them. No stockholder
approval of the distribution is required or sought. You
are not being asked for a proxy.
Q:
Why is no stockholder vote required to approve the
separation and its material terms?
A:
Delaware law does not require a shareholder vote to
approve the separation because the separation does not
constitute a transfer of all or substantially all of the
assets of ConocoPhillips to Phillips 66.
Q:
How will fractional shares be treated in the
separation?
A:
ConocoPhillips will not distribute any fractional shares
of Phillips 66 common stock to ConocoPhillips
stockholders.
7
Table of Contents
Fractional shares of Phillips 66 common stock to which
ConocoPhillips stockholders of record would otherwise
be entitled will be aggregated and sold in the public
market by the distribution agent. The aggregate net cash
proceeds of the sales will be distributed pro rata to each
holder who would otherwise have been entitled to
receive a fractional share in the distribution. Proceeds
from these sales will generally result in a taxable gain or
loss to those stockholders. Each stockholder entitled to
receive cash proceeds from these shares should consult
his, her or its own tax advisor as to such stockholder’s
particular circumstances. The tax consequences of the
distribution are described in more detail under “The
Separation—Material U.S. Federal Income Tax
Consequences of the Distribution.”
Q:
If I sell my shares of ConocoPhillips common stock
before or on the distribution date, will I still be
entitled to receive Phillips 66 shares in the
distribution with respect to the sold shares?
A:
Beginning on or shortly before the record date and
continuing up to and including the distribution date, we
expect there will be two markets in ConocoPhillips
common stock: a “regular way” market and an
“ex-distribution” market. Shares of ConocoPhillips
common stock that trade on the regular way market will
trade with an entitlement to receive shares of our
common stock to be distributed in the distribution.
Shares that trade on the ex-distribution market will trade
without an entitlement to receive shares of our common
stock to be distributed in the distribution, so that holders
who sell shares ex-distribution will be entitled to receive
shares of our common stock even
though they have sold their shares of ConocoPhillips
common stock after the record date. Therefore, if you
owned shares of ConocoPhillips common stock on the
record date and sell those shares on the regular way
market before the distribution date, you will also be
selling the shares of our common stock that would have
been distributed to you in the distribution. If you own
shares of ConocoPhillips common stock at 5:00 p.m.
Eastern Time on the record date and sell these shares in
the ex-distribution market on any date up to and
including the distribution date, you will still receive the
shares of our common stock that you would be entitled to
receive in respect of your ownership of the shares of
ConocoPhillips common stock that you sold. You are
encouraged to consult with your financial advisor
regarding the specific implications of selling your
ConocoPhillips common stock prior to or on the
distribution date.
Q:
Will the distribution affect the number of shares of
ConocoPhillips I currently hold?
A:
No, the number of shares of ConocoPhillips common
stock held by a stockholder will be unchanged. The
market value of each ConocoPhillips share, however,
will decline to reflect the impact of the distribution.
Q:
What are the U.S. federal income tax consequences of
the distribution of shares of Phillips 66 common stock
to U.S. stockholders?
A:
The distribution is conditioned upon, among other
matters, ConocoPhillips’ receipt of a private letter ruling
from the U.S. Internal Revenue Service (IRS) in form
and substance satisfactory to
8
Table of Contents
ConocoPhillips in its sole discretion, to the effect that the
distribution, together with certain related transactions,
will qualify as a reorganization for U.S. federal income
tax purposes under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code of 1986, as amended, which we
refer to as the “Code.”
ConocoPhillips has received a private letter ruling from
the IRS, and an opinion from counsel, to the effect that
the distribution will so qualify. On the basis the
distribution so qualifies, for U.S. federal income tax
purposes, you will not recognize any gain or loss, and no
amount will be included in your income, upon your
receipt of shares of Phillips 66 common stock pursuant
to the distribution, except with respect to any cash
received in lieu of fractional shares.
You should consult your own tax advisor as to the
particular consequences of the distribution to you,
including the applicability and effect of any U.S. federal,
state and local tax laws, as well as foreign tax laws,
which may result in the distribution being taxable to you.
For more information regarding the private letter ruling,
the tax opinion and certain U.S. federal income tax
consequences of the distribution, see the summary under
“The Separation—Material U.S. Federal Income Tax
Consequences of the Distribution.”
Q:
How will I determine the tax basis I will have in my
ConocoPhillips shares after the distribution and the
Phillips 66 shares I receive in the distribution?
A:
Generally, for U.S. federal income tax purposes, your
aggregate basis in your shares of ConocoPhillips
common stock and the shares of Phillips 66 common
stock you receive in the distribution
(including any fractional share for which cash is
received) will equal the aggregate basis of
ConocoPhillips common stock held by you immediately
before the distribution. This aggregate basis should be
allocated between your shares of ConocoPhillips
common stock and the shares of Phillips 66 common
stock you receive in the distribution (including any
fractional share for which cash is received) in proportion
to the relative fair market value of each immediately
following the distribution. See “The
Separation—Material U.S. Federal Income Tax
Consequences of the Distribution.”
Q:
Will I receive a stock certificate for Phillips 66 shares
distributed as a result of the distribution?
A:
No. Registered holders of ConocoPhillips common stock
who are entitled to participate in the distribution will
receive a book-entry account statement reflecting their
ownership of Phillips 66 common stock. For additional
information, registered stockholders in the United States,
Canada or Puerto Rico should contact ConocoPhillips’
transfer agent, Computershare Shareowner Services
LLC, at 800-356-0066 or through its website at
www.bnymellon.com. Stockholders from outside the
United States, Canada and Puerto Rico may call
1-201-680-6578. See “The Separation—When and How
You Will Receive the Distribution of Phillips 66
Shares.”
Q:
What if I hold my shares through a broker, bank or
other nominee?
A:
ConocoPhillips stockholders who hold their shares
through a broker, bank or other nominee will have their
brokerage account credited with Phillips 66 common
stock. For additional information, those stockholders
should contact their broker or bank directly.
9
Table of Contents
Q:
What if I have stock certificates reflecting my shares
of ConocoPhillips common stock? Should I send them
to the transfer agent or to ConocoPhillips?
A:
No, you should not send your stock certificates to the
transfer agent or to ConocoPhillips. You should retain
your ConocoPhillips stock certificates.
Q:
Why is the separation of the two companies
structured as a distribution of shares of Phillips 66?
A:
ConocoPhillips believes a distribution of shares in
Phillips 66 in a transaction that is generally tax-free for
U.S. federal income tax purposes is the most
tax-efficient way to separate the companies.
Q:
Can ConocoPhillips decide to cancel the distribution
of the Phillips 66 common stock even if all the
conditions have been met?
A:
Yes. ConocoPhillips has the right to terminate the
distribution at any time prior to the distribution date,
even if all of the conditions to the distribution are
satisfied, if at any time ConocoPhillips’ Board of
Directors determines the distribution is not in the best
interests of ConocoPhillips and its stockholders.
Q:
Will Phillips 66 incur any debt prior to or at the time
of the separation?
A:
Yes. We have entered into new financing arrangements
in anticipation of the separation and distribution. We
expect to incur up to $7.8 billion of new debt (composed
of $5.8 billion in the form of fixed-rate senior notes
issued in March 2012 and $2.0 billion in the form of a
three-year term loan). We also will accept assignment of
approximately $0.2 billion of existing ConocoPhillips
debt associated with downstream operations. At
separation, we plan to retain a minimum of $2.0 billion
in cash and cash equivalents and make a cash distribution
of approximately $5.8 billion to ConocoPhillips, subject
to working capital adjustments. ConocoPhillips intends
to use the proceeds of the cash distribution from us
solely to make distributions to its stockholders,
repurchase outstanding ConocoPhillips common stock,
repay debt owed by ConocoPhillips to unrelated third
parties, or a combination of the foregoing, in each case
within 12 months following the distribution. See “The
Separation—Incurrence of Debt.”
Following the separation, our debt obligations could
restrict our business and may adversely impact our
financial condition, results of operations or cash flows.
In addition, our separation from ConocoPhillips’ other
businesses may increase the overall cost of debt funding
and decrease the overall debt capacity and commercial
credit available to the businesses collectively. Also, our
business, financial condition, results of operations and
cash flows could be harmed by a deterioration of our
credit profile or by factors adversely affecting the credit
markets generally. See “Risk Factors—Risks Relating to
the Separation.”
Q:
Does Phillips 66 intend to pay cash dividends?
A:
Yes. We intend to pay a cash dividend at an initial rate of
$0.20 per share per quarter, or $0.80 per share per year,
beginning in the third quarter of 2012. The declaration
and amount of all future dividends, however, will be
determined by our Board of Directors and will depend
on our financial condition, earnings, capital
requirements, covenants associated with certain debt
obligations, legal requirements, regulatory constraints,
industry practice and any other factors that
10
Table of Contents
our Board of Directors believes are relevant. See
“Dividend Policy.”
Q:
Will Phillips 66 common stock trade on a stock
market?
A:
Yes. Currently, there is no public market for our
common stock. Subject to the consummation of the
separation, Phillips 66 common stock has been
authorized for listing on the NYSE under the ticker
symbol “PSX .” We cannot predict the trading prices for
our common stock when such trading begins.
Q:
Will my shares of ConocoPhillips common stock
continue to trade?
A:
Yes. ConocoPhillips common stock will continue to be
listed and trade on the NYSE under the ticker symbol
“COP.”
Q:
Will the separation affect the trading price of my
ConocoPhillips stock?
A:
Yes. The trading price of shares of ConocoPhillips
common stock immediately following the distribution is
expected to be lower than immediately prior to the
distribution because the trading price will no longer
reflect the value of the Downstream business. We cannot
provide you with any assurance regarding the price at
which the ConocoPhillips shares will trade following the
separation.
Q:
What will happen to ConocoPhillips stock options,
restricted shares, restricted stock units, performance
stock units and stock appreciation rights?
A:
For information on the treatment of ConocoPhillips
equity-based compensation awards, see “The
Separation—Treatment of Equity-Based Compensation”
and “Certain
Relationships and Related Transactions—Agreements
with ConocoPhillips—Employee Matters Agreement.”
Q:
What will the relationship between ConocoPhillips
and Phillips 66 be following the separation?
A:
After the separation, ConocoPhillips will not own any
shares of Phillips 66 common stock, and each of
ConocoPhillips and Phillips 66 will be independent,
publicly traded companies with their own management
teams and Boards of Directors. However, in connection
with the separation, we will enter into a number of
agreements with ConocoPhillips governing the
separation and allocating responsibilities for obligations
arising before and after the separation, including, among
others, obligations relating to our employees, taxes and
intellectual property. See “Certain Relationships and
Related Transactions—Agreements with
ConocoPhillips.”
Q:
Will I have appraisal rights in connection with the
separation and distribution?
A:
No. Holders of ConocoPhillips common stock are not
entitled to appraisal rights in connection with the
separation and distribution.
Q:
Who is the transfer agent for your common stock?
A:
Computershare Shareowner Services LLC
480 Washington Boulevard
Jersey City, New Jersey 07310
Q:
Who is the distribution agent for the distribution?
A:
Computershare Shareowner Services LLC
480 Washington Boulevard
Jersey City, New Jersey 07310
11
Table of Contents
Q:
Whom can I contact for more information?
A:
If you have questions relating to the mechanics of the
distribution of Phillips 66 shares, you should contact the
distribution agent:
Computershare Shareowner Services LLC
480 Washington Boulevard
Jersey City, New Jersey 07310
Telephone: 800-356-0066 or 1-201-680-6578 (outside
the United States, Canada and Puerto Rico)
Before the separation, if you have
questions relating to the separation and
distribution, you should contact
ConocoPhillips at:
ConocoPhillips
600 North Dairy Ashford
Houston, TX 77079
Attention: Shareholder Relations
Telephone: 281-293-6800
Email: [email protected]
12
Table of Contents
Summary of the Separation and Distribution
The following is a summary of the material terms of the separation, distribution and other related transactions.
Distributing company
ConocoPhillips, a Delaware corporation. After the distribution, ConocoPhillips will
not own any shares of Phillips 66 common stock.
Distributed company
Phillips 66, a Delaware corporation, is a wholly owned subsidiary of ConocoPhillips
that was formed in 2011 and that, at the time of the distribution, will hold, through its
subsidiaries, all of the assets and liabilities of ConocoPhillips’ Downstream business.
After the distribution, Phillips 66 will be an independent, publicly traded company.
Distributed company structure
Phillips 66 is a holding company. At the time of the distribution it will own, directly
or indirectly, the shares of a number of subsidiaries operating its global businesses.
The main U.S. operating company is Phillips 66 Company.
Record date
The record date for the distribution is 5:00 p.m. Eastern Time on April 16, 2012.
Distribution date
The distribution date is April 30, 2012.
Distributed securities
ConocoPhillips will distribute 100 percent of the shares of Phillips 66 common stock
outstanding immediately prior to the distribution. Based on the approximately 1,280
million shares of ConocoPhillips common stock outstanding on January 31, 2012, and
applying the distribution ratio of one share of Phillips 66 common stock for every two
shares of ConocoPhillips common stock, ConocoPhillips will distribute
approximately 640 million shares of Phillips 66 common stock to ConocoPhillips
stockholders who hold ConocoPhillips common stock as of the record date.
Distribution ratio
Each holder of ConocoPhillips common stock will receive one share of Phillips 66
common stock for every two shares of ConocoPhillips common stock held at 5:00
p.m. Eastern Time on April 16, 2012.
Fractional shares
ConocoPhillips will not distribute any fractional shares of Phillips 66 common stock
to ConocoPhillips stockholders. Instead, as soon as practicable on or after the
distribution date, the distribution agent will aggregate fractional shares into whole
shares, sell the whole shares in the open market and distribute the aggregate cash
proceeds, net of brokerage fees and other costs, from the sales pro rata to each holder
who would otherwise have been entitled to receive a fractional share in the
distribution. The distribution agent will determine when, how, through which
broker-dealers and at what prices to sell the aggregated fractional shares. Recipients
of cash in lieu of fractional shares will
13
Table of Contents
not be entitled to any interest on the amounts of payments made in lieu of fractional
shares. The receipt of cash in lieu of fractional shares generally will be taxable to the
recipient stockholders for U.S. federal income tax purposes as described in “The
Separation—Material U.S. Federal Income Tax Consequences of the Distribution” in
this Information Statement.
Distribution method
Phillips 66 common stock will be issued only by direct registration in book-entry
form. Registration in book-entry form is a method of recording stock ownership when
no physical paper share certificates are issued to stockholders, as is the case in this
distribution.
Conditions to the distribution
The distribution is subject to the satisfaction or waiver by ConocoPhillips of the
following conditions, as well as other conditions described in this Information
Statement in “The Separation—Conditions to the Distribution”:
• The U.S. Securities and Exchange Commission (SEC) will have
declared effective our registration statement on Form 10, of which this
Information Statement is a part, under the Securities Exchange Act of
1934, as amended; no order suspending the effectiveness of the
registration statement shall be in effect; and no proceedings for such
purpose shall be pending before or threatened by the SEC.
• Any required actions and filings with regard to state securities and
blue sky laws of the United States (and any comparable laws under
any foreign jurisdictions) will have been taken and, where applicable,
have become effective or been accepted.
• The Phillips 66 common stock will have been authorized for listing on
the NYSE or another national securities exchange approved by
ConocoPhillips, subject to official notice of issuance.
• Prior to the distribution, this Information Statement will have been
mailed to the holders of ConocoPhillips common stock as of the
record date.
• ConocoPhillips will have received a private letter ruling from the IRS
in form and substance satisfactory to ConocoPhillips in its sole
discretion, to the effect that the distribution, together with certain
related transactions, will qualify as a reorganization for U.S. federal
income tax purposes under Sections 355 and 368(a)(1)(D) of the
Code.
• No order, injunction, decree or regulation issued by any court or
agency of competent jurisdiction or other legal
14
Table of Contents
restraint or prohibition preventing consummation of the distribution
will be in effect.
• Any government approvals and other material consents necessary to
consummate the distribution will have been obtained and be in full
force and effect.
The fulfillment of the foregoing conditions does not create any obligations on
ConocoPhillips’ part to effect the distribution, and the ConocoPhillips Board of
Directors has reserved the right, in its sole discretion, to abandon, modify or change
the terms of the distribution, including by accelerating or delaying the timing of the
consummation of all or part of the distribution, at any time prior to the distribution
date.
Stock exchange listing
Subject to the consummation of the separation, our shares of common stock have
been authorized for listing on the NYSE under the ticker symbol “PSX.”
Dividend policy
We intend to pay a cash dividend at an initial rate of $0.20 per share per quarter, or
$0.80 per share per year, beginning in the third quarter of 2012. However, the
declaration and amount of all dividends will be at the discretion of our Board of
Directors and will depend upon factors the Board of Directors deems relevant. For
more information, see “Dividend Policy.”
Transfer agent
Computershare Shareowner Services LLC.
U.S. federal income tax consequences
On the basis that the distribution, together with certain related transactions, will
qualify as a reorganization for U.S. federal income tax purposes, no gain or loss will
be recognized by a stockholder of ConocoPhillips, and no amount will be included in
the income of a stockholder of ConocoPhillips for U.S. federal income tax purposes,
upon the receipt of shares of our common stock pursuant to the distribution, except
with respect to any cash received in lieu of fractional shares. For more information
regarding the potential U.S. federal income tax consequences to you of the
distribution, see “The Separation—Material U.S. Federal Income Tax Consequences
of the Distribution.”
15
Table of Contents
Summary Risk Factors
Our business is subject to a number of risks, including risks related to the separation and distribution. The following list of risk factors is
not exhaustive. Please read “Risk Factors” carefully for a more thorough description of these and other risks.
Risks Relating to the Separation
•
We may not realize the potential benefits from the separation, and our historical combined and pro forma financial information
is not necessarily indicative of our future prospects.
•
We have no history operating as an independent public company. We will incur significant costs to create the corporate
infrastructure necessary to operate as an independent public company, and we may experience increased ongoing costs in
connection with being an independent public company.
•
In connection with our separation from ConocoPhillips, ConocoPhillips will indemnify us for certain liabilities, and we will
indemnify ConocoPhillips for certain liabilities. If we are required to act under these indemnities to ConocoPhillips, we may
need to divert cash to meet those obligations, and our financial results could be negatively impacted. The ConocoPhillips
indemnity may not be sufficient to insure us against the full amount of liabilities for which it will be allocated responsibility, and
ConocoPhillips may not be able to satisfy its indemnification obligations in the future.
•
Following the separation, we will have debt obligations that could restrict our business and adversely impact our financial
condition, results of operations or cash flows. In addition, the separation of our business from ConocoPhillips’ businesses may
increase the overall cost of debt funding and decrease the overall debt capacity and commercial credit available to the businesses
collectively. Also, our business, financial condition, results of operations and cash flows could be harmed by a deterioration of
our credit profile or by factors adversely affecting the credit markets generally.
•
Several members of our Board of Directors and management may have actual or potential conflicts of interest because of their
ownership of shares of common stock of ConocoPhillips.
•
If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S.
federal income tax purposes, you and ConocoPhillips could be subject to significant tax liability and, in certain circumstances,
we could be required to indemnify ConocoPhillips for material taxes pursuant to indemnification obligations under the Tax
Sharing Agreement.
•
We may not be able to engage in desirable strategic or capital raising transactions following the distribution. In addition, under
some circumstances, we could be liable for adverse tax consequences resulting from engaging in significant strategic or capital
raising transactions.
Risks Relating to Our Industry and Our Business
•
Our operating results and our future rate of growth are exposed to the effects of changing commodity prices and refining and
petrochemical margins.
16
Table of Contents
•
Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing on acceptable terms
and can adversely affect the financial strength of our business partners.
•
We expect to continue to incur substantial capital expenditures and operating costs as a result of our compliance with existing
and future environmental laws and regulations. Likewise, future environmental laws and regulations may impact or limit our
current business plans and reduce demand for our products.
•
Domestic and worldwide political and economic developments could damage our operations and materially reduce our
profitability and cash flows.
•
Activities in our Chemicals and Midstream segments involve numerous risks that may result in accidents or otherwise affect the
ability of our equity affiliates to make distributions to us.
•
Our operations present hazards and risks, which may not be fully covered by insurance, if insured. If a significant accident or
event occurs for which we are not adequately insured, our operations and financial results could be adversely affected.
•
We are subject to interruptions of supply and increased costs as a result of our reliance on third-party transportation of crude oil
and refined products.
•
Competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources
may have a competitive advantage.
•
A significant interruption in one or more of our refineries could adversely affect our business.
Risks Relating to Ownership of Our Common Stock
•
Because there has not been any public market for our common stock, the market price and trading volume of our common stock
may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following
the distribution.
•
A large number of our shares are, or will be, eligible for future sale, which may cause the market price for our common stock to
decline.
•
If our common stock is not included in the Standard & Poor’s 500 Index or other stock indices, significant amounts of our
common stock could be sold in the open market where they may not meet with offsetting new demand.
•
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of us.
•
We may issue preferred stock with terms that could dilute the voting power or reduce the value of our common stock.
17
Table of Contents
SELECTED COMBINED FINANCIAL DATA OF PHILLIPS 66
The following selected financial data reflect the combined operations of Phillips 66. We derived the selected combined income statement data
for the years ended December 31, 2011, 2010 and 2009, and the selected combined balance sheet data as of December 31, 2011 and 2010, as
set forth below, from Phillips 66’s audited combined financial statements, which are included elsewhere in this Information Statement. We
derived the selected combined income statement data for the year ended December 31, 2008, and the selected combined balance sheet data as
of December 31, 2009, from Phillips 66’s audited combined financial statements, which are not included in this Information Statement. We
derived the selected combined income statement data for the year ended December 31, 2007, and the selected combined balance sheet data as
of December 31, 2008 and 2007, from Phillips 66’s underlying financial records, which were derived from the financial records of
ConocoPhillips, and which are not included in this Information Statement. The historical results do not necessarily indicate the results expected
for any future period.
To ensure full understanding, you should read the selected combined financial data presented below in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and accompanying notes
included elsewhere in this Information Statement.
Millions of Dollars
Year Ended December 31
Sales and other operating revenues
Net income
Net income attributable to Phillips 66
Total assets
Long-term debt
2011
2010
2009
2008
2007
$ 196,088
4,780
4,775
43,211
361
146,561
740
735
44,955
388
112,692
479
476
42,880
403
171,706
2,665
2,662
38,934
417
139,383
6,121
6,116
43,133
442
18
Table of Contents
RISK FACTORS
You should carefully consider each of the following risks and all of the other information contained in this Information Statement. Some of
these risks relate principally to our separation from ConocoPhillips, while others relate principally to our business and the industry in which
we operate or to the securities markets generally and ownership of our common stock.
Our business, prospects, financial condition, results of operations or cash flows could be materially and adversely affected by any of these
risks, and, as a result, the trading price of our common stock could decline.
Risks Relating to the Separation
We may not realize the potential benefits from the separation, and our historical combined and pro forma financial information is not
necessarily indicative of our future prospects.
We may not realize the potential benefits we expect from our separation from ConocoPhillips. We have described those anticipated benefits
elsewhere in this Information Statement. See “The Separation—Reasons for the Separation.” In addition, we will incur significant costs,
including those described below, which may exceed our estimates, and we will incur some negative effects from our separation from
ConocoPhillips, including loss of access to some of the financial, managerial and professional resources from which we have benefited in the
past.
Our historical combined and pro forma financial information is not necessarily indicative of our future financial condition, future results of
operations or future cash flows, nor does it reflect what our financial condition, results of operations or cash flows would have been as an
independent public company during the periods presented. The historical combined financial information is not necessarily indicative of our
future financial condition, results of operations or cash flows primarily because of the following factors:
•
Our historical combined financial results reflect allocations of expenses for services historically provided by ConocoPhillips, and
those allocations may be significantly lower than the comparable expenses we would have incurred as an independent company.
•
Our working capital requirements historically have been satisfied as part of ConocoPhillips’ corporate-wide cash management
programs, and our cost of debt and other capital may significantly differ from that reflected in our historical combined financial
statements.
•
The historical combined financial information may not fully reflect the costs associated with being an independent public company,
including significant changes that may occur in our cost structure, management, financing arrangements and business operations as a
result of our separation from ConocoPhillips, including all the costs related to being an independent public company.
•
The historical combined financial information may not fully reflect the effects of certain liabilities that we will incur or assume.
We based the pro forma adjustments on available information and assumptions that may prove not to be accurate. In addition, our unaudited
pro forma condensed combined financial information may not give effect to various ongoing additional costs we may incur in connection with
being an independent public company. Accordingly, our unaudited pro forma condensed combined financial information does not reflect what
our financial condition, results of operations or cash flows would have been as an independent public company and is not necessarily indicative
of our future financial condition or future results of operations.
19
Table of Contents
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed
Combined Financial Statements” and our historical combined financial statements and the notes to those statements included elsewhere in this
Information Statement.
We have no history operating as an independent public company. We will incur significant costs to create the corporate infrastructure
necessary to operate as an independent public company, and we may experience increased ongoing costs in connection with being an
independent public company.
We have historically used ConocoPhillips’ corporate infrastructure to support our business functions, including information technology
systems. The expenses related to establishing and maintaining this infrastructure were spread among all of ConocoPhillips’ businesses.
Following the separation and after the expiration of the Transition Services Agreement, we will no longer have access to ConocoPhillips’
infrastructure, and we will need to establish our own. We expect to incur costs beginning in 2012 to establish the necessary infrastructure. See
“Unaudited Pro Forma Condensed Combined Financial Statements.”
ConocoPhillips currently performs many important corporate functions for us, including some treasury, tax administration, accounting,
financial reporting, human resources, compensation, legal and other services. We currently compensate ConocoPhillips for many of these
services on a cost-allocation basis. Following the separation, ConocoPhillips will continue to provide some of these services to us on a
transitional basis, generally for a period of up to 12 months, with a possible extension of 6 months, pursuant to a Transition Services
Agreement that we will enter into with ConocoPhillips. For more information regarding the Transition Services Agreement, see “Certain
Relationships and Related Transactions—Agreements with ConocoPhillips—Transition Services Agreement.” ConocoPhillips may not
successfully execute all these functions during the transition period or we may have to expend significant efforts or costs materially in excess of
those estimated under the Transition Services Agreement. Any interruption in these services could have a material adverse effect on our
business, financial condition, results of operation and cash flows. In addition, at the end of this transition period, we will need to perform these
functions ourselves or hire third parties to perform these functions on our behalf. The costs associated with performing or outsourcing these
functions may exceed the amounts reflected in our historical combined financial statements or that we have agreed to pay ConocoPhillips
during the transition period. A significant increase in the costs of performing or outsourcing these functions could materially and adversely
affect our business, financial condition, results of operations and cash flows.
Currently, we are not directly subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended, which we
refer to as the “Exchange Act.” After the separation, we will be directly subject to reporting and other obligations under the Exchange Act,
including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which will require, in the future, annual management
assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting
firm addressing the effectiveness of these controls. These reporting and other obligations will place significant demands on our management
and administrative and operational resources, including accounting resources.
We will be subject to continuing contingent liabilities of ConocoPhillips following the separation.
After the separation, there will be several significant areas where the liabilities of ConocoPhillips may become our obligations. For example,
under the Code and the related rules and regulations, each corporation that was a member of the ConocoPhillips consolidated U.S. federal
income tax reporting group during any taxable period or portion of any taxable period ending on or before the effective time of the distribution
is jointly and severally liable for the U.S. federal income tax liability of the entire ConocoPhillips consolidated
20
Table of Contents
tax reporting group for that taxable period. In connection with the separation, we will enter into a Tax Sharing Agreement with ConocoPhillips
that will allocate the responsibility for prior period taxes of the ConocoPhillips consolidated tax reporting group between us and
ConocoPhillips. See “Certain Relationships and Related Transactions—Agreements with ConocoPhillips—Tax Sharing Agreement.”
ConocoPhillips may be unable to pay any prior period taxes for which it is responsible, and we could be required to pay the entire amount of
such taxes. Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans as
well as other contingent liabilities.
If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal
income tax purposes, you and ConocoPhillips could be subject to significant tax liability and, in certain circumstances, we could be
required to indemnify ConocoPhillips for material taxes pursuant to indemnification obligations under the Tax Sharing Agreement.
ConocoPhillips has received a private letter ruling from the IRS substantially to the effect that, among other things, the distribution, together
with certain related transactions, will qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355
and 368(a)(1)(D) of the Code. The private letter ruling and the tax opinion that the ConocoPhillips Board of Directors has received from
Wachtell, Lipton, Rosen & Katz, special counsel to ConocoPhillips, relied on certain representations, assumptions and undertakings, including
those relating to the past and future conduct of our business, and neither the private letter ruling nor the opinion would be valid if such
representations, assumptions and undertakings were incorrect. Moreover, the private letter ruling does not address all the issues that are
relevant to determining whether the distribution will qualify for tax-free treatment. Notwithstanding the private letter ruling and the tax
opinion, the IRS could determine the distribution should be treated as a taxable transaction for U.S. federal income tax purposes if it determines
any of the representations, assumptions or undertakings that were included in the request for the private letter ruling are false or have been
violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling. For more information regarding the private
letter ruling and the opinion, see “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution.”
If the distribution fails to qualify for tax-free treatment, in general, ConocoPhillips would be subject to tax as if it had sold the Phillips 66
common stock in a taxable sale for its fair market value, and ConocoPhillips stockholders who receive shares of Phillips 66 common stock in
the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.
Under the Tax Sharing Agreement between ConocoPhillips and us, we would generally be required to indemnify ConocoPhillips against any
tax resulting from the distribution to the extent that such tax resulted from (i) an acquisition of all or a portion of our stock or assets, whether by
merger or otherwise, (ii) other actions or failures to act by us, or (iii) any of our representations or undertakings being incorrect or violated. For
a more detailed discussion, see “Certain Relationships and Related Transactions—Agreements with ConocoPhillips—Tax Sharing
Agreement.” Our indemnification obligations to ConocoPhillips and its subsidiaries, officers and directors are not limited by any maximum
amount. If we are required to indemnify ConocoPhillips or such other persons under the circumstances set forth in the Tax Sharing Agreement,
we may be subject to substantial liabilities.
21
Table of Contents
We may not be able to engage in desirable strategic or capital-raising transactions following the distribution. In addition, under some
circumstances, we could be liable for adverse tax consequences resulting from engaging in significant strategic or capital-raising
transactions.
To preserve the tax-free treatment to ConocoPhillips of the distribution, for the two-year period following the distribution we may be
prohibited, except in specified circumstances, from:
•
•
•
•
•
Entering into any transaction pursuant to which all or a portion of our stock would be acquired, whether by merger or otherwise.
Issuing equity securities beyond certain thresholds.
Repurchasing our common stock.
Ceasing to actively conduct the refining business.
Taking or failing to take any other action that prevents the distribution and related transactions from being tax-free.
These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the
value of our business. For more information, see “The Separation—Material U.S. Federal Income Tax Consequences of the Distribution” and
“Certain Relationships and Related Transactions—Agreements with ConocoPhillips—Tax Sharing Agreement.”
In connection with our separation from ConocoPhillips, ConocoPhillips will indemnify us for certain liabilities and we will indemnify
ConocoPhillips for certain liabilities. If we are required to act on these indemnities to ConocoPhillips, we may need to divert cash to meet
those obligations and our financial results could be negatively impacted. The ConocoPhillips indemnity may not be sufficient to insure us
against the full amount of liabilities for which it will be allocated responsibility, and ConocoPhillips may not be able to satisfy its
indemnification obligations in the future.
Pursuant to the Indemnification and Release Agreement and certain other agreements with ConocoPhillips, ConocoPhillips will agree to
indemnify us for certain liabilities, and we will agree to indemnify ConocoPhillips for certain liabilities, in each case for uncapped amounts, as
discussed further in “Certain Relationships and Related Transactions—Agreements with ConocoPhillips—Indemnification and Release
Agreement.” Indemnities that we may be required to provide ConocoPhillips are not subject to any cap, may be significant and could
negatively impact our business, particularly indemnities relating to our actions that could impact the tax-free nature of the distribution. Third
parties could also seek to hold us responsible for any of the liabilities that ConocoPhillips has agreed to retain. Further, the indemnity from
ConocoPhillips may not be sufficient to protect us against the full amount of such liabilities, and ConocoPhillips may not be able to fully
satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from ConocoPhillips any amounts for which we
are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results
of operations and financial condition.
After the separation, ConocoPhillips’ insurers may deny coverage to us for losses associated with occurrences prior to the separation.
In connection with the separation, we will enter into agreements with ConocoPhillips to address several matters associated with the separation,
including insurance coverage. See “Certain Relationships and Related Transactions—Agreements with ConocoPhillips.” After the separation,
ConocoPhillips’ insurers may deny coverage to us for losses associated with occurrences prior to the separation. Accordingly, we may be
required to temporarily or permanently bear the costs of such lost coverage.
22
Table of Contents
Following the separation, we will have debt obligations that could restrict our business and adversely impact our financial condition, results
of operations or cash flows. In addition, the separation of our business from ConocoPhillips’ businesses may increase the overall cost of
debt funding and decrease the overall debt capacity and commercial credit available to the businesses collectively.
Immediately following the separation, we expect to bear a total combined indebtedness for borrowed money and capital lease obligations of
approximately $8 billion. We may also incur substantial additional indebtedness in the future. Our indebtedness may impose various
restrictions and covenants on us that could have material adverse consequences.
Our separation from ConocoPhillips’ other businesses may increase the overall cost of debt funding and decrease the overall debt capacity and
commercial credit available to the businesses collectively.
We potentially could have received better terms from unaffiliated third parties than the terms we receive in our agreements with
ConocoPhillips.
The agreements we will enter into with ConocoPhillips in connection with the separation, including the Separation and Distribution Agreement,
Tax Sharing Agreement, Employee Matters Agreement, Indemnification and Release Agreement and Transition Services Agreement, will have
been negotiated in the context of the separation while we were still a wholly owned subsidiary of ConocoPhillips. Accordingly, during the
period in which the terms of those agreements will have been negotiated, we will not have had an independent Board of Directors or a
management team independent of ConocoPhillips. As a result, the terms of those agreements may not reflect terms that would have resulted
from arm’s-length negotiations between unaffiliated third parties. The terms of the agreements to be negotiated in the context of the separation
relate to, among other things, the allocation of assets, liabilities, rights and other obligations between ConocoPhillips and us. Arm’s-length
negotiations between ConocoPhillips and an unaffiliated third party in another form of transaction, such as a buyer in a sale of a business
transaction, may have resulted in more favorable terms to the unaffiliated third party. See “Certain Relationships and Related
Transactions—Agreements with ConocoPhillips.”
Several members of our Board of Directors and management may have actual or potential conflicts of interest because of their ownership
of shares of common stock of ConocoPhillips.
Several members of our Board of Directors and management own common stock of ConocoPhillips and/or stock options to purchase common
stock of ConocoPhillips or other equity-based awards because of their current or prior relationships with ConocoPhillips, which could create, or
appear to create, potential conflicts of interest when our directors and executive officers are faced with decisions that could have different
implications for ConocoPhillips and us. See “Management” and “Directors.”
Transfer or assignment to us of certain contracts, investments in joint ventures and other assets may require the consent of a third party. If
such consent is not given, we may not be entitled to the benefit of such contracts, investments and other assets in the future.
Transfer or assignment of certain of the contracts, investments in joint ventures and other assets in connection with our separation from
ConocoPhillips require the consent of a third party to the transfer or assignment. Similarly, in some circumstances, we are joint beneficiaries of
contracts, and we will need to
23
Table of Contents
enter into a new agreement with the third party to replicate the existing contract or assign the portion of the existing contract related to our
business. Some parties may use the requirement of a consent to seek more favorable contractual terms from us. If we are unable to obtain such
consents on commercially reasonable and satisfactory terms, we may be unable to obtain some of the benefits, assets and contractual
commitments that are intended to be allocated to us as part of our separation from ConocoPhillips. In addition, where we do not intend to
obtain consent from third party counterparties based on our belief that no consent is required, the third party counterparties may challenge a
transfer of assets to us on the basis that the terms of the applicable commercial arrangements require their consent. We may incur substantial
litigation and other costs in connection with any such claims and, if we do not prevail, our ability to use these assets could be adversely
impacted.
Risks Relating to Our Industry and Our Business
Our operating results and our future rate of growth are exposed to the effects of changing commodity prices and refining and
petrochemical margins.
Our revenues, operating results and future rate of growth are highly dependent on a number of factors, including fixed and variable expenses
(including the cost of crude oil and other refinery feedstocks) and the margin relative to those expenses at which we are able to sell refined
products. In recent years, the prices of crude oil and refined products have fluctuated substantially. These prices depend on numerous factors
beyond our control, including the global supply and demand for crude oil, gasoline and other refined products, which are subject to, among
other things:
•
•
•
•
•
•
Changes in the global economy and the level of foreign and domestic production of crude oil and refined products.
Availability of crude oil and refined products and the infrastructure to transport crude oil and refined products.
Local factors, including market conditions, the level of operations of other refineries in our markets, and the volume of refined
products imported.
Threatened or actual terrorist incidents, acts of war and other global political conditions.
Government regulations.
Weather conditions, hurricanes or other natural disasters.
The price of crude oil influences prices for refined products. We do not produce crude oil and must purchase all of the crude oil we process.
Many crude oils available on the world market will not meet the quality restrictions for use in our refineries. Others are not economical to use
due to excessive transportation costs or for other reasons. The prices for crude oil and refined products can fluctuate differently based on
global, regional and local market conditions. In addition, the timing of the relative movement of the prices (both among different classes of
refined products and among various global markets for similar refined products), as well as the overall change in refined product prices, can
reduce refining margins and could have a significant impact on our refining, wholesale marketing and retail operations, revenues, operating
income and cash flows. Also, crude oil supply contracts generally have market-responsive pricing provisions. We purchase our refinery
feedstocks weeks before manufacturing and selling the refined products. Price level changes during the period between purchasing feedstocks
and selling the refined products from these feedstocks could have a significant effect on our financial results. We also purchase refined
products produced by others for sale to our customers. Price level changes during the periods between purchasing and selling these refined
products also could have a material adverse effect on our business, financial condition and results of operations.
24
Table of Contents
Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing on acceptable terms and can
adversely affect the financial strength of our business partners.
Our ability to obtain credit and capital depends in large measure on the state of the credit and capital markets, which is beyond our control. Our
ability to access credit and capital markets may be restricted at a time when we would like, or need, access to those markets, which could
constrain our flexibility to react to changing economic and business conditions. In addition, the cost and availability of debt and equity
financing may be adversely impacted by unstable or illiquid market conditions. Protracted uncertainty and illiquidity in these markets also
could have an adverse impact on our lenders, commodity hedging counterparties, or our customers, preventing them from meeting their
obligations to us.
From time to time, our cash needs may exceed our internally generated cash flow, and our business could be materially and adversely affected
if we are unable to obtain necessary funds from financing activities. From time to time, we may need to supplement our cash generated from
operations with proceeds from financing activities. Following the separation, at a minimum, we will have a liquidity facility, such as a
revolving credit facility, to provide us with available financing intended to meet any ongoing cash needs in excess of internally generated cash
flows. Uncertainty and illiquidity in financial markets may materially impact the ability of the participating financial institutions to fund their
commitments to us under our liquidity facility. Accordingly, we may not be able to obtain the full amount of the funds available under our
liquidity facility to satisfy our cash requirements, and our failure to do so could have a material adverse effect on our operations and financial
position.
Deterioration in our credit profile could increase our costs of borrowing money and limit our access to the capital markets and commercial
credit, and could trigger our partners’ rights under joint venture arrangements.
Based on our expected capital structure and a comparison with peers in our industry, we have received an investment grade credit rating from
Standard & Poor’s Ratings Services and Moody’s Investors Service. (Ratings from credit agencies are not recommendations to buy, sell or hold
our securities; and each rating should be evaluated independently of any other rating.) Our credit ratings could be lowered or withdrawn
entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating below investment
grade, our borrowing costs would increase, and our funding sources could decrease. In addition, a failure by us to maintain an investment grade
rating could affect our business relationships with suppliers and operating partners. For example, our agreement with Chevron regarding
CPChem permits Chevron to buy our 50 percent interest in CPChem for fair market value if, at any time after the separation, we experience a
change in control or if both Moody’s Investor Service and Standard & Poor’s Ratings Service lower our credit ratings below investment grade
and the credit rating from either rating agency remains below investment grade for 365 days thereafter, with fair market value determined by
agreement or by nationally recognized investment banks. As a result of these factors, a downgrade of our credit ratings could have a materially
adverse impact on our future operations and financial position.
25
Table of Contents
We expect to continue to incur substantial capital expenditures and operating costs as a result of our compliance with existing and future
environmental laws and regulations. Likewise, future environmental laws and regulations may impact or limit our current business plans
and reduce demand for our products.
Our business is subject to numerous laws and regulations relating to the protection of the environment. These laws and regulations continue to
increase in both number and complexity and affect our operations with respect to, among other things:
•
•
•
•
The discharge of pollutants into the environment.
Emissions into the atmosphere (such as nitrogen oxides, sulfur dioxide and mercury emissions, and greenhouse gas emissions as
they are, or may become, regulated).
The handling, use, storage, transportation, disposal and clean up of hazardous materials and hazardous and nonhazardous wastes.
The dismantlement, abandonment and restoration of our properties and facilities at the end of their useful lives.
We have incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of these
laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services,
our business, financial condition, results of operations and cash flows in future periods could be materially adversely affected.
To the extent there are significant changes in the Earth’s climate, such as more severe or frequent weather conditions in the markets we serve or
the areas where our assets reside, we could incur increased expenses, our operations could be materially impacted, and demand for our products
could fall.
Domestic and worldwide political and economic developments could damage our operations and materially reduce our profitability and
cash flows.
Actions of the U.S., state, local and international governments through tax and other legislation, executive order and commercial restrictions
could reduce our operating profitability both in the United States and abroad. The U.S. government can prevent or restrict us from doing
business in foreign countries. These restrictions and those of foreign governments could limit our ability to operate in, or gain access to,
opportunities in various countries, as well as limit our ability to obtain the optimum slate of crude oil and other refinery feedstocks. Actions by
both the United States and host governments may affect our operations significantly in the future.
Renewable fuels and alternative energy mandates could reduce demand for refined products. Tax incentives and other subsidies can make
renewable fuels and alternative energy more competitive with refined products than they otherwise might be, which may reduce refined product
margins and hinder the ability of refined products to compete with renewable fuels.
Large refinery capital projects can take many years to complete, and market conditions could deteriorate significantly between the project
approval date and the project startup date, negatively impacting project returns.
To approve a large-scale capital project at a refinery, the project must meet an acceptable level of return on the capital to be employed into the
project. We base these forecasted project economics on our best estimate of future market conditions. Most large-scale refinery projects take
many years to complete. During this multi-year period, market conditions can change from those we forecast, and these changes could be
significant. Accordingly, we may not be able to realize our expected returns from a large investment in a refinery capital project, and this could
negatively impact our results of operations, cash flows and our return on capital employed.
26
Table of Contents
Our investments in joint ventures decrease our ability to manage risk.
We conduct some of our operations, including a large part of our Midstream segment and our entire Chemicals segment, through joint ventures
in which we share control with our joint venture participants. Our joint venture participants may have economic, business or legal interests or
goals that are inconsistent with those of the joint venture or us, or our joint venture participants may be unable to meet their economic or other
obligations, and we may be required to fulfill those obligations alone. Failure by us, or an entity in which we have a joint venture interest, to
adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or
results of operations of our joint ventures and, in turn, our business and operations.
Activities in our Chemicals and Midstream segments involve numerous risks that may result in accidents or otherwise affect the ability of
our equity affiliates to make distributions to us.
There are a variety of hazards and operating risks inherent in the manufacture of petrochemicals and the gathering, processing, transmission,
storage, and distribution of natural gas and NGL, such as spills, leaks, explosions and mechanical problems that could cause substantial
financial losses. In addition, these risks could result in significant injury, loss of human life, damage to property, environmental pollution and
impairment of operations, any of which could result in substantial losses. For assets located near populated areas, including residential areas,
commercial business centers, industrial sites and other public gathering areas, the level of damage resulting from these risks could be greater.
Should any of these risks materialize, it could have a material adverse effect on the business and financial condition of CPChem, DCP
Midstream or Rockies Express Pipeline and negatively impact their ability to make future distributions to us.
Our operations present hazards and risks, which may not be fully covered by insurance, if insured. If a significant accident or event occurs
for which we are not adequately insured, our operations and financial results could be adversely affected.
The scope and nature of our operations present a variety of operational hazards and risks, including explosions, fires, toxic emissions, maritime
hazards and natural catastrophes, that must be managed through continual oversight and control. For example, the operation of refineries,
power plants, fractionators, pipelines and terminals is inherently subject to the risks of spills, discharges or other inadvertent releases of
petroleum or hazardous substances. If any of these events had previously occurred or occurs in the future in connection with any of our
refineries, pipelines or refined products terminals, or in connection with any facilities which receive our wastes or by-products for treatment or
disposal, other than events for which we are indemnified, we could be liable for all costs and penalties associated with their remediation under
federal, state, local and international environmental laws or common law, and could be liable for property damage to third-parties caused by
contamination from releases and spills. These and other risks are present throughout our operations. As protection against these hazards and
risks, we maintain insurance against many, but not all, potential losses or liabilities arising from such operating risks. As such, our insurance
coverage may not be sufficient to fully cover us against potential losses arising from such risks. Uninsured losses and liabilities arising from
operating risks could reduce the funds available to us for capital and investment spending and could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
We are subject to interruptions of supply and increased costs as a result of our reliance on third-party transportation of crude oil and
refined products.
We often utilize the services of third parties to transport crude oil, NGL and refined products to and from our facilities. In addition to our own
operational risks discussed above, we could experience interruptions of supply or increases in costs to deliver refined products to market if the
ability of the pipelines or vessels to transport crude oil or refined products is disrupted because of weather events, accidents, governmental
27
Table of Contents
regulations or third-party actions. A prolonged disruption of the ability of a pipeline or vessel to transport crude oil or refined product to or
from one or more of our refineries could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
Because of the natural decline in production from existing wells in DCP Midstream’s areas of operation, its success depends on its ability to
obtain new sources of natural gas and NGL. Any decrease in the volumes of natural gas DCP Midstream gathers could adversely affect its
business and operating results.
DCP Midstream’s gathering and transportation pipeline systems are connected to or dependent on the level of production from natural gas
wells, from which production will naturally decline over time. As a result, its cash flows associated with these wells will also decline over time.
In order to maintain or increase throughput levels on its gathering and transportation pipeline systems and NGL pipelines and the asset
utilization rates at its natural gas processing plants, DCP Midstream must continually obtain new supplies. The primary factors affecting DCP
Midstream’s ability to obtain new supplies of natural gas and NGL, and to attract new customers to its assets, include the level of successful
drilling activity near these assets, the demand for natural gas and crude oil, producers’ desire and ability to obtain necessary permits in an
efficient manner, natural gas field characteristics and production performance, surface access and infrastructure issues, and its ability to
compete for volumes from successful new wells. If DCP Midstream is not able to obtain new supplies of natural gas to replace the natural
decline in volumes from existing wells or because of competition, throughput on its pipelines and the utilization rates of its treating and
processing facilities would decline. This could have a material adverse effect on its business, results of operations, financial position and cash
flows, and its ability to make cash distributions to us.
Increased regulation of hydraulic fracturing could result in reductions or delays in natural gas production by our customers, which could
adversely impact our results of operations.
An increasing percentage of DCP Midstream’s customers’ oil and natural gas production is being developed from unconventional sources, such
as deep natural gas shales. These reservoirs require hydraulic fracturing completion processes to release the natural gas from the rock so it can
flow through casing to the surface. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation
to stimulate natural gas production. The U.S. Environmental Protection Agency, as well as several state agencies, commenced studies and/or
convened hearings regarding the potential environmental impacts of hydraulic fracturing activities. At the same time, certain environmental
groups have suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process, and
legislation has been proposed to provide for such regulation. We cannot predict whether any such legislation will ever be enacted and, if so,
what its provisions would be. Any additional levels of regulation and permits required with the adoption of new laws and regulations at the
federal or state level could lead to delays, increased operating costs and process prohibitions that could reduce the volumes of natural gas that
move through DCP Midstream’s gathering systems. This would materially adversely affect its results of operations and its ability to make cash
distributions to us.
Competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a
competitive advantage.
The refining and marketing industry is highly competitive with respect to both feedstock supply and refined product markets. We compete with
many companies for available supplies of crude oil and other feedstocks and for outlets for our refined products. We do not produce any of our
crude oil feedstocks. Some of our competitors, however, obtain a portion of their feedstocks from their own production and some have more
extensive retail outlets than we have. Competitors that have their own production or extensive retail outlets (and greater brand-name
recognition) are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better
positioned to withstand periods of depressed refining margins or feedstock shortages.
28
Table of Contents
Some of our competitors also have materially greater financial and other resources than we have. Such competitors have a greater ability to
bear the economic risks inherent in all phases of our business. In addition, we compete with other industries that provide alternative means to
satisfy the energy and fuel requirements of our industrial, commercial and individual consumers.
We may incur losses as a result of our forward-contract activities and derivative transactions.
We currently use commodity derivative instruments, and we expect to continue their use in the future. If the instruments we utilize to hedge our
exposure to various types of risk are not effective, we may incur losses.
A significant interruption in one or more of our refineries could adversely affect our business.
Our refineries are our principal operating assets. As a result, our operations could be subject to significant interruption if one or more of our
refineries were to experience a major accident or mechanical failure, encounter work stoppages relating to organized labor issues, be damaged
by severe weather or other natural or man-made disaster, such as an act of terrorism, or otherwise be forced to shut down. If any refinery were
to experience an interruption in operations, earnings from the refinery could be materially adversely affected (to the extent not recoverable
through insurance, if insured) because of lost production and repair costs. A significant interruption in one or more of our refineries could also
lead to increased volatility in prices for crude oil feedstocks and refined products, and could increase instability in the financial and insurance
markets, making it more difficult for us to access capital and to obtain insurance coverage that we consider adequate.
Risks Relating to Ownership of Our Common Stock
Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be
volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the distribution.
Prior to the distribution, there will have been no trading market for our common stock. An active trading market may not develop or be
sustained for our common stock after the distribution, and we cannot predict the prices at which our common stock will trade after the
distribution. The market price of our common stock could fluctuate significantly due to a number of factors, many of which are beyond our
control, including:
•
•
•
•
•
•
•
•
•
Fluctuations in our quarterly or annual earnings results or those of other companies in our industry.
Failures of our operating results to meet the estimates of securities analysts or the expectations of our stockholders or changes by
securities analysts in their estimates of our future earnings.
Announcements by us or our customers, suppliers or competitors.
Changes in laws or regulations which adversely affect our industry or us.
Changes in accounting standards, policies, guidance, interpretations or principles.
General economic, industry and stock market conditions.
Future sales of our common stock by our stockholders.
Future issuances of our common stock by us.
The other factors described in these “Risk Factors” and elsewhere in this Information Statement.
A large number of our shares are or will be eligible for future sale, which may cause the market price for our common stock to decline.
Upon completion of the distribution, we will have outstanding an aggregate of approximately 640 million shares of our common stock.
Virtually all of those shares will be freely tradable without restriction or registration under the Securities Act of 1933, as amended. We are
unable to predict whether large amounts
29
Table of Contents
of our common stock will be sold in the open market following the distribution. We are also unable to predict whether a sufficient number of
buyers will be in the market at that time. As discussed in the immediately following risk factor, certain ConocoPhillips stockholders may be
required to sell shares of our common stock that they receive in the distribution. In addition, other ConocoPhillips stockholders may sell the
shares of our common stock they receive in the distribution for various reasons. For example, such stockholders may not believe our business
profile or level of market capitalization as an independent company fits their investment objectives. A change in the level of analyst coverage
following the distribution could also negatively impact demand for our shares. The sale of significant amounts of our common stock or the
perception in the market that this will occur may lower the market price of our common stock. A prolonged, significant decline in our share
price and market capitalization could provide evidence for a need to record a material impairment of the amount of goodwill on our balance
sheet.
If our common stock is not included in the Standard & Poor’s 500 Index or other stock indices, significant amounts of our common stock
could be sold in the open market where they may not meet with offsetting new demand.
A portion of ConocoPhillips’ outstanding common stock is held by index funds tied to the Standard & Poor’s 500 Index or other stock indices.
Based on a review of publicly available information as of December 31, 2011, we believe at least 25 percent of ConocoPhillips’ outstanding
common stock is held by index funds. We expect our common stock will be included in the Standard & Poor’s 500 Index. To the extent our
common stock is not included in this or other stock indices at the time of the distribution, index funds currently holding shares of
ConocoPhillips common stock will be required to sell the shares of our common stock they receive in the distribution. There may not be
sufficient new buying interest to offset sales by those index funds. Accordingly, our common stock could experience a high level of volatility
immediately following the distribution and, as a result, the price of our common stock could be adversely affected.
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of us, even if that change may be
considered beneficial by some of our stockholders.
The existence of some provisions of our Certificate of Incorporation and By-laws and Delaware law could discourage, delay or prevent a
change in control of us that a stockholder may consider favorable. These include provisions:
•
•
•
•
Authorizing a large number of shares of common stock that are not yet issued, which would allow our Board of Directors to issue
shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to
dilute the stock ownership of persons seeking to obtain control of us.
Providing for our directors to be divided into three classes serving staggered three-year terms, with directors to be elected at each
annual meeting of stockholders to succeed the class of directors whose terms have expired.
Prohibiting stockholders from calling special meetings of stockholders or taking action by written consent.
Establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing
matters that can be acted on by stockholders at the annual stockholder meetings.
In addition, following the distribution, we will be subject to Section 203 of the Delaware General Corporation Law, which may have an
anti-takeover effect with respect to transactions not approved in advance by our Board of Directors, including discouraging takeover attempts
that could have resulted in a premium over the market price for shares of our common stock.
30
Table of Contents
These provisions apply even if a takeover offer may be considered beneficial by some stockholders and could delay or prevent an acquisition
that our Board of Directors determines is not in the best interests of our company and our stockholders. See “Description of Capital Stock.”
We may issue preferred stock with terms that could dilute the voting power or reduce the value of our common stock.
Our Certificate of Incorporation to be in effect at the time of the distribution will authorize us to issue, without the approval of our
stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional
and other special rights, including preferences over our common stock respecting dividends and distributions, as our Board of Directors
generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our
common stock. For example, we could grant holders of preferred stock the right to elect some number of our directors in all events or on the
happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation
preferences we could assign to holders of preferred stock could affect the residual value of the common stock. See “Description of Capital
Stock—Preferred Stock.”
31
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Information Statement includes forward-looking statements, including in the sections entitled “Summary,” “Risk Factors,” “The
Separation,” “Business and Properties” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies,
financing plans, competitive position, credit ratings, dividend growth, potential growth opportunities, potential operating performance
improvements, potential improvements in return on capital employed, benefits resulting from our separation from ConocoPhillips, the effects of
competition and the effects of future legislation or regulations. You can identify our forward-looking statements by the words “anticipate,”
“estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,”
“expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.
We based the forward-looking statements on our current expectations, estimates and projections about ourselves and the industries in which we
operate in general. We caution you that these statements are not guarantees of future performance as they involve assumptions that, while made
in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these
forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results
may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety
of factors, including the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Fluctuations in crude oil, NGL, and natural gas prices, refining and marketing margins and margins for our chemicals business.
Failure of new products and services to achieve market acceptance.
Unexpected changes in costs or technical requirements for constructing, modifying or operating facilities for manufacturing, refining
or transportation projects.
Unexpected technological or commercial difficulties in manufacturing, refining or transporting our products, including chemicals
products.
Lack of, or disruptions in, adequate and reliable transportation for our crude oil, natural gas, NGL, and refined products.
The level and success of natural gas drilling around DCP Midstream’s assets, the level and quality of gas production volumes
around its assets and its ability to connect supplies to its gathering and processing systems in light of competition.
Inability to timely obtain or maintain permits, including those necessary for refinery projects; comply with government regulations;
or make capital expenditures required to maintain compliance.
Failure to complete definitive agreements and feasibility studies for, and to timely complete construction of, announced and future
refinery, chemical plant, midstream and transportation projects.
Potential disruption or interruption of our operations due to accidents, extraordinary weather events, civil unrest, political events,
terrorism or cyber attacks.
International monetary conditions and exchange controls.
Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.
Liability for remedial actions, including removal and reclamation obligations, under environmental regulations.
Liability resulting from litigation.
General domestic and international economic and political developments, including armed hostilities; expropriation of assets;
changes in governmental policies relating to crude oil, natural
32
Table of Contents
•
•
•
•
•
•
•
•
•
•
•
gas, NGL or refined product pricing, regulation or taxation; other political, economic or diplomatic developments; and international
monetary fluctuations.
Changes in tax, environmental and other laws and regulations (including alternative energy mandates) applicable to our business.
Limited access to capital or significantly higher cost of capital related to illiquidity or uncertainty in the domestic or international
financial markets.
Inability to obtain economical financing for projects, construction or modification of facilities and general corporate purposes.
The operation and financing of our joint ventures.
Domestic and foreign supplies of crude oil and other feedstocks.
Domestic and foreign supplies of refined products, such as gasoline, diesel, jet fuel, home heating oil and petrochemicals.
Overcapacity or undercapacity in the refining and chemical industries.
Fluctuations in consumer demand for refined products.
Crude and refined product inventory levels.
The separation, as well as any agreements related thereto and the anticipated effects of restructuring or reorganization of business
components.
The factors generally described in the section entitled “Risk Factors” in this Information Statement.
33
Table of Contents
THE SEPARATION
General
On April 4, 2012, the Board of Directors of ConocoPhillips approved the distribution to its stockholders of all the shares of common stock of
Phillips 66. Phillips 66 is a wholly owned subsidiary of ConocoPhillips that at the time of the distribution will hold, through its subsidiaries, the
assets and liabilities associated with ConocoPhillips’ Downstream business. Immediately following the distribution, ConocoPhillips
stockholders as of the record date will own 100 percent of the outstanding shares of common stock of Phillips 66.
The distribution of Phillips 66 common stock as described in this Information Statement is subject to the satisfaction or waiver of certain
conditions. We cannot provide any assurances ConocoPhillips will complete the distribution. For a more detailed description of these
conditions, see “Conditions to the Distribution,” below.
Reasons for the Separation
Since the 2002 merger that created ConocoPhillips, its strategic focus—capturing the benefits of integration to provide the scale and scope
needed to compete effectively across business segments—has led to significant shareholder value creation. As the business environment in
which ConocoPhillips operates has evolved, however, ConocoPhillips’ strategic vision for its businesses also has evolved in response.
Significant factors in the business environment evolution include: increased exertion of control over resources by host nations in many
countries where the upstream sector operates, fostering rising competition from national oil companies and resulting in a reduction in resource
access and production shared with international oil companies; increasing competition from more flexible and faster-responding pure-play
companies in the upstream sector, particularly for emerging opportunities; decline in demand for gasoline in industrialized nations coupled with
rising demand for other refined products and the emergence of new markets for the downstream sector in the developing world; and a shift in
investor attitudes favoring a level of transparency that is increasingly difficult to provide for a company having a complex, integrated business
model.
In light of these and other considerations, in July 2011 the Board of Directors of ConocoPhillips approved pursuing the repositioning of
ConocoPhillips’ businesses into two leading energy companies.
The ConocoPhillips Board of Directors believes separating the Downstream business from ConocoPhillips’ exploration and production
business through the distribution is in the best interests of ConocoPhillips and its stockholders and has concluded the separation will provide
ConocoPhillips and Phillips 66 with a number of opportunities and benefits, including the following:
•
Strategic Focus —Position each company to pursue a more focused strategy, with ConocoPhillips well-positioned for organic
growth through ongoing strategic initiatives in the upstream sector, and Phillips 66 well-positioned to pursue value creation
strategies in the downstream sector with greater flexibility as a result of being an independent and dedicated downstream company.
•
Management Focus —Allow management of each company to concentrate that company’s resources wholly on its particular market
segments, customers and core businesses, with greater ability to anticipate and respond faster to changing markets and new
opportunities. Operationally, both companies will be positioned as leaders in their segments, with sufficient size to manage risks and
anticipate and respond to opportunities. Each company will be able to focus on its core operations, with greater management focus
on customized strategies that can deliver long-term shareholder value.
34
Table of Contents
•
Recruiting and Retaining Employees —Allow each company to recruit and retain employees with expertise directly applicable to its
needs and pursuant to compensation policies that are appropriate for its specific lines of business. In particular, following the
distribution, the value of equity-based incentive compensation arrangements offered by each company should be more closely
aligned with the performance of its businesses. Such equity-based compensation arrangements should provide enhanced incentives
for employee performance and improve the ability of each company to attract, retain and motivate qualified personnel at all levels of
the organization.
•
Access to Capital and Capital Structure —Eliminate competition for capital between the two business lines. Instead, both
companies will have direct access to the debt and equity capital markets to fund their respective growth strategies and to establish a
capital structure and dividend policy appropriate for their business needs. In addition, the separation will result in separately traded
stocks reflecting a pure-play upstream company and an integrated downstream company that will facilitate each company’s growth
strategy.
•
Investor Choice —Provide investors with a more targeted investment opportunity in each company that offers different investment
and business characteristics, including different opportunities for growth, capital structure, business models and financial returns.
This will allow investors to evaluate the separate and distinct merits, performance and future prospects of each company.
The Number of Shares You Will Receive
For every two shares of ConocoPhillips common stock you own at 5:00 p.m. Eastern Time on April 16, 2012, the record date, you will receive
one share of Phillips 66 common stock on the distribution date.
Treatment of Fractional Shares
The distribution agent will not distribute any fractional shares of our common stock to ConocoPhillips stockholders. Instead, as soon as
practicable on or after the distribution date, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the
open market and distribute the aggregate cash proceeds from the sales, net of brokerage fees and other costs, pro rata to each holder who would
otherwise have been entitled to receive a fractional share in the distribution. The distribution agent will determine when, how, through which
broker-dealers and at what prices to sell the aggregated fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to
any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be
taxable to the recipient stockholders for U.S. federal income tax purposes as described below in “Material U.S. Federal Income Tax
Consequences of the Distribution.”
When and How You Will Receive the Distribution of Phillips 66 Shares
ConocoPhillips will distribute the shares of our common stock on April 30, 2012, to holders of record on the record date. The distribution is
expected to occur following the NYSE market closing on the distribution date. ConocoPhillips’ transfer agent and registrar, Computershare
Shareowner Services LLC (Computershare), will serve as transfer agent and registrar for the Phillips 66 common stock and as distribution
agent in connection with the distribution.
If you own ConocoPhillips common stock as of 5:00 p.m. Eastern Time on the record date, the shares of Phillips 66 common stock that you are
entitled to receive in the distribution will be issued electronically, as of the distribution date, to your account as follows:
•
Registered Stockholders . If you own your shares of ConocoPhillips stock directly, either in book-entry form through an account at
ConocoPhillips’ transfer agent and/or if you hold paper stock certificates, you will receive your shares of Phillips 66 common stock
by way of direct registration
35
Table of Contents
in book-entry form. Registration in book-entry form is a method of recording stock ownership when no physical paper share
certificates are issued to stockholders, as is the case in this distribution.
On or shortly after the distribution date, the distribution agent will mail to you an account statement that indicates the number of
shares of Phillips 66 common stock that have been registered in book-entry form in your name.
Stockholders having any questions concerning the mechanics of having shares of our common stock registered in book-entry form
may contact Computershare at the address set forth in “Questions and Answers About the Separation and Distribution” in this
Information Statement.
•
Beneficial Stockholders . Many ConocoPhillips stockholders hold their shares of ConocoPhillips common stock beneficially through
a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership
would be recorded on the bank or brokerage firm’s books. If you hold your ConocoPhillips common stock through a bank or
brokerage firm, your bank or brokerage firm will credit your account for the shares of Phillips 66 common stock that you are entitled
to receive in the distribution. If you have any questions concerning the mechanics of having shares of common stock held in “street
name,” we encourage you to contact your bank or brokerage firm.
Treatment of Equity-Based Compensation
Following the separation, all holders of exercisable awards of stock options and stock appreciation rights will receive both adjusted
ConocoPhillips awards and Phillips 66 awards. Similarly, employees who hold unrestricted stock acquired through past equity awards will be
treated like all other ConocoPhillips stockholders in the distribution. Each employee holder of unexercisable stock options will hold stock
options only in the company that employs such employee following the separation. There are no unexercisable stock appreciation rights
outstanding. Employee holders of restricted stock and performance share units awarded for completed performance periods under the
Performance Share Program (and equivalent predecessor programs) will receive both adjusted ConocoPhillips awards and Phillips 66 awards.
Each employee holder of restricted stock and restricted stock units awarded under all other programs will hold restricted shares or restricted
stock units in the company that employs such employee following the separation. In addition, former employee holders and a specified group
of holders of previously unvested stock options and restricted stock units, who are retiring or terminating employment upon or shortly after the
separation, will receive both adjusted ConocoPhillips awards and Phillips 66 awards (and the specified group will be vested in their option
awards made in 2012). See also “Certain Relationships and Related Transactions—Agreements with ConocoPhillips—Employee Matters
Agreement.”
Treatment of 401(k) Shares
The shares of ConocoPhillips common stock held in tax-qualified defined contribution retirement plans maintained by ConocoPhillips in the
United States will be treated in the same manner as outstanding shares of ConocoPhillips common stock on the record date for the
distribution. For every two shares of ConocoPhillips common stock held in an account in the applicable defined contribution retirement plan,
such account will be credited with one share of Phillips 66 common stock on the distribution date.
36
Table of Contents
Results of the Distribution
After our separation from ConocoPhillips, we will be an independent, publicly traded company. Immediately following the distribution, we
expect to have approximately 57,800 stockholders of record, based on the number of registered stockholders of ConocoPhillips common stock
on January 31, 2012, and approximately 640 million shares of Phillips 66 common stock outstanding. The actual number of shares to be
distributed will be determined on the record date and will reflect any exercise of ConocoPhillips stock options and stock appreciation rights
(SARs), and the vesting of ConocoPhillips restricted stock units (RSUs) and performance stock units (PSUs) prior to the record date for the
distribution.
Before the distribution, we will enter into a Separation and Distribution Agreement and several other agreements with ConocoPhillips to effect
the separation and provide a framework for our relationship with ConocoPhillips after the separation. These agreements will provide for the
allocation between Phillips 66 and ConocoPhillips of ConocoPhillips’ assets, liabilities and obligations subsequent to the separation (including
with respect to transition services, employee matters, intellectual property matters, tax matters and certain other commercial relationships).
For a more detailed description of these agreements, see the section entitled “Certain Relationships and Related Transactions—Agreements
with ConocoPhillips” included elsewhere in this Information Statement. The distribution will not affect the number of outstanding shares of
ConocoPhillips common stock or any rights of ConocoPhillips stockholders.
Incurrence of Debt
In accordance with the plan of reorganization, we expect to incur up to $7.8 billion of new debt and will accept assignment of approximately
$0.2 billion of existing ConocoPhillips debt associated with downstream operations. Of the new debt, $5.8 billion was incurred in March 2012,
in the form of fixed-rate senior notes with maturities ranging from three to 30 years. The remainder of the new debt will consist of a three-year
amortizing term loan. At separation, we plan to retain a minimum of $2.0 billion of cash and cash equivalents and provide a cash distribution of
approximately $5.8 billion to ConocoPhillips, subject to working capital adjustments. ConocoPhillips intends to use the proceeds of the cash
distribution from us solely to make distributions to its stockholders, repurchase outstanding ConocoPhillips common stock, repay debt owed by
ConocoPhillips to unrelated third parties, or a combination of the foregoing, in each case within 12 months following the distribution.
We have designed our capital structure to maintain an investment grade credit rating from Standard & Poor’s Ratings Services and Moody’s
Investors Service. We believe this structure will ensure adequate liquidity for day-to-day operations and contingencies upon separation and, by
ensuring that our debt remains investment grade upon separation, will create favorable terms for our initial financings.
Material U.S. Federal Income Tax Consequences of the Distribution
The following is a summary of the material U.S. federal income tax consequences of the distribution to U.S. Holders (as defined below) of
ConocoPhillips common stock that receive shares of Phillips 66 common stock in the distribution. This summary is based on the Code, the U.S.
Treasury regulations promulgated thereunder, and interpretations of the Code and the U.S. Treasury regulations by the courts and the IRS, in
effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. This summary does not discuss all the tax
considerations that may be relevant to ConocoPhillips stockholders in light of their particular circumstances, nor does it address the
consequences to ConocoPhillips stockholders
37
Table of Contents
subject to special treatment under the U.S. federal income tax laws (such as holders other than U.S. Holders (as defined below), insurance
companies, dealers or brokers in securities or currencies, tax-exempt organizations, financial institutions, mutual funds, pass-through entities
and investors in such entities, holders who hold their shares as a hedge or as part of a hedging, straddle, conversion, synthetic security,
integrated investment or other risk-reduction transaction or who are subject to alternative minimum tax or holders who acquired their shares
upon the exercise of employee stock options or otherwise as compensation). In addition, this summary does not address the U.S. federal income
tax consequences to those ConocoPhillips stockholders who do not hold their ConocoPhillips common stock as a capital asset. Finally, this
summary does not address any state, local or foreign tax consequences. CONOCOPHILLIPS STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. TAX
CONSEQUENCES OF THE DISTRIBUTION TO THEM.
For purposes of this discussion, a U.S. Holder is a beneficial owner of ConocoPhillips common stock that is, for U.S. federal income tax
purposes:
•
•
•
•
An individual who is a citizen or resident of the United States.
A corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the
laws of the United States or any state thereof or the District of Columbia.
An estate, the income of which is subject to U.S. federal income taxation regardless of its source.
A trust, if (1) a court within the United States is able to exercise primary supervision over its administration and one or more U.S.
persons have the authority to control all of the substantial decisions of such trust or (2) in the case of a trust that was treated as a
domestic trust under the law in effect before 1997, a valid election is in place under applicable Treasury regulations.
If a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) holds ConocoPhillips common stock, the tax
treatment of a partner will generally depend on the status of the partner and on the activities of the partnership. Partners in a partnership holding
ConocoPhillips common stock should consult their own tax advisors regarding the tax consequences of the distribution.
Distribution— The distribution is conditioned upon ConocoPhillips’ receipt of a private letter ruling from the IRS, substantially to the effect
that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under
Sections 355 and 368(a)(1)(D) of the Code. ConocoPhillips has received this private letter ruling from the IRS, and the ConocoPhillips Board
of Directors has received an opinion from Wachtell, Lipton, Rosen & Katz, special counsel to ConocoPhillips, substantially to the effect that
the distribution will so qualify.
On the basis the distribution so qualifies, in general, for U.S. federal income tax purposes: (i) the distribution will not result in any taxable
income, gain or loss to ConocoPhillips, except for taxable income or gain possibly arising as a result of certain intercompany transactions;
(ii) no gain or loss will be recognized by (and no amount will be included in the income of) U.S. Holders of ConocoPhillips common stock
upon their receipt of shares of Phillips 66 common stock in the distribution, except with respect to cash received in lieu of any fractional share
measured by the difference between the cash received for such fractional share and the U.S. Holder’s basis in that fractional share, as
determined below; (iii) the aggregate basis of the ConocoPhillips common stock and the Phillips 66 common stock (including any fractional
share interests in Phillips 66 common stock for which cash is received) in the hands of each U.S. Holder of ConocoPhillips common stock after
the distribution will equal the aggregate basis of ConocoPhillips common stock held by the U.S. Holder immediately before the distribution,
allocated between the ConocoPhillips common stock and the Phillips 66 common stock in proportion to the relative fair market value of each
on the date of the distribution; and (iv) the holding period of the Phillips 66 common stock received by each U.S. Holder of ConocoPhillips
common stock (including any fractional share interests in
38
Table of Contents
Phillips 66 common stock for which cash is received) will include the holding period at the time of the distribution for the ConocoPhillips
common stock on which the distribution is made, provided that the ConocoPhillips common stock is held as a capital asset on the date of the
distribution.
Although a private letter ruling from the IRS generally is binding on the IRS, if the factual representations or assumptions made in the letter
ruling request are untrue or incomplete in any material respect, we will not be able to rely on the ruling. Furthermore, the IRS will not rule on
whether a distribution satisfies certain requirements necessary to obtain tax-free treatment under Section 355 of the Code. Rather, the ruling is
based upon representations by ConocoPhillips that these conditions have been satisfied, and any inaccuracy in such representations could
invalidate the ruling. In addition to obtaining the ruling from the IRS, the ConocoPhillips Board of Directors has received an opinion from
Wachtell, Lipton, Rosen & Katz substantially to the effect that the distribution, together with certain related transactions, will qualify as a
reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The opinion relies on the ruling as to
matters covered by the ruling. In addition, the opinion is based on, among other things, certain assumptions and representations made by
ConocoPhillips and us, which if incorrect or inaccurate in any material respect would jeopardize the conclusions reached by counsel in its
opinion. The opinion is not binding on the IRS or the courts.
Notwithstanding receipt by ConocoPhillips of the private letter ruling from the IRS and the opinion of counsel, the IRS could assert that the
distribution does not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position,
ConocoPhillips stockholders and ConocoPhillips could be subject to significant U.S. federal income tax liability. In general, ConocoPhillips
would be subject to tax as if it had sold the Phillips 66 common stock in a taxable sale for its fair market value and ConocoPhillips stockholders
who receive shares of Phillips 66 common stock in the distribution would be subject to tax as if they had received a taxable distribution equal
to the fair market value of such shares. In addition, even if the distribution was otherwise to qualify under Section 355 of the Code, it may be
taxable to ConocoPhillips (but not to ConocoPhillips stockholders) under Section 355(e) of the Code, if the distribution was later deemed to be
part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50
percent or greater interest in ConocoPhillips or us. For this purpose, any acquisitions of ConocoPhillips stock or of our common stock within
the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan,
although we or ConocoPhillips may be able to rebut that presumption.
U.S. Treasury regulations also generally provide that if a U.S. Holder of ConocoPhillips common stock holds different blocks of
ConocoPhillips common stock (generally shares of ConocoPhillips common stock purchased or acquired on different dates or at different
prices), the aggregate basis for each block of ConocoPhillips common stock purchased or acquired on the same date and at the same price will
be allocated, to the greatest extent possible, between the shares of Phillips 66 common stock received in the distribution in respect of such
block of ConocoPhillips common stock and such block of ConocoPhillips common stock, in proportion to their respective fair market values,
and the holding period of the shares of Phillips 66 common stock received in the distribution in respect of such block of ConocoPhillips
common stock will include the holding period of such block of ConocoPhillips common stock, provided that such block of ConocoPhillips
common stock was held as a capital asset on the distribution date. If a U.S. Holder of ConocoPhillips common stock is not able to identify
which particular shares of Phillips 66 common stock are received in the distribution with respect to a particular block of ConocoPhillips
common stock, for purposes of applying the rules described above, the U.S. Holder may designate which shares of Phillips 66 common stock
are received in the distribution in respect of a particular block of ConocoPhillips common stock, provided that such designation is consistent
with the terms of the distribution. Holders of ConocoPhillips common stock are urged to consult their own tax advisors regarding the
application of these rules to their particular circumstances.
39
Table of Contents
Tax Sharing Agreement— In connection with the distribution, we and ConocoPhillips will enter into a Tax Sharing Agreement pursuant to
which we will agree to be responsible for certain liabilities and obligations following the distribution. In general, under the terms of the Tax
Sharing Agreement, in the event the distribution were to fail to qualify for U.S. federal income tax purposes under Sections 355 and
368(a)(1)(D) of the Code (including as a result of Section 355(e) of the Code) and if such failure were the result of actions taken by us after the
distribution, we would be responsible for all taxes imposed on ConocoPhillips to the extent such taxes result from such actions. Further, if such
failure were the result of any acquisition of our shares or assets or any of our representations or undertakings being incorrect or breached, we
would be responsible for all taxes imposed on ConocoPhillips as a result. For a more detailed discussion, see “Certain Relationships and
Related Transactions—Agreements with ConocoPhillips—Tax Sharing Agreement.” Our indemnification obligations to ConocoPhillips and its
subsidiaries, officers and directors are not limited in amount or subject to any cap. If we are required to indemnify ConocoPhillips and its
subsidiaries and their respective officers and directors under the circumstances set forth in the Tax Sharing Agreement, we may be subject to
substantial liabilities.
Information Reporting and Backup Withholding— U.S. Treasury regulations require certain stockholders who receive stock in a distribution
to attach to the stockholder’s U.S. federal income tax return for the year in which the distribution occurs a detailed statement setting forth
certain information relating to the tax-free nature of the distribution. In addition, payments of cash to a ConocoPhillips stockholder in lieu of
fractional shares of Phillips 66 common stock in the distribution may be subject to information reporting, unless the stockholder provides proof
of an applicable exemption. Such payments that are subject to information reporting may also be subject to backup withholding (currently at a
rate of 28 percent), unless the stockholder provides a correct taxpayer identification number and otherwise complies with the requirements of
the backup withholding rules. Backup withholding does not constitute an additional tax, but merely an advance payment, which may be
refunded or credited against a stockholder’s U.S. federal income tax liability, provided the required information is timely supplied to the IRS.
THE FOREGOING IS A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
UNDER CURRENT LAW AND FOR GENERAL INFORMATION ONLY. THE FOREGOING DOES NOT PURPORT TO ADDRESS
ALL U.S. FEDERAL INCOME TAX CONSEQUENCES OR TAX CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OR
THAT MAY APPLY TO PARTICULAR CATEGORIES OF STOCKHOLDERS. EACH CONOCOPHILLIPS STOCKHOLDER SHOULD
CONSULT THEIR OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO SUCH
STOCKHOLDER, INCLUDING THE APPLICATION OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE
EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.
Market for Common Stock
There is not currently a public market for Phillips 66 common stock. A condition to the distribution is the listing on the NYSE of our common
stock. Subject to the consummation of the separation, Phillips 66 common stock has been authorized for listing on the NYSE under the ticker
symbol “PSX.”
Trading Between Record Date and Distribution Date
Beginning on, or shortly before, the record date and continuing up to and including the distribution date, we expect there will be two markets in
ConocoPhillips common stock: a “regular-way” market and an “ex-distribution” market. Shares of ConocoPhillips common stock that trade on
the “regular-way” market will trade with an entitlement to receive shares of Phillips 66 common stock in the distribution. Shares that trade on
the “ex-distribution” market will trade without an entitlement to receive shares of Phillips 66
40
Table of Contents
common stock in the distribution. Therefore, if you sell shares of ConocoPhillips common stock in the “regular-way” market after 5:00 p.m.
Eastern Time on the record date and up to and including through the distribution date, you will be selling your right to receive shares of
Phillips 66 common stock in the distribution. If you own shares of ConocoPhillips common stock at 5:00 p.m. Eastern Time on the record date
and sell those shares in the “ex-distribution” market, up to and including through the distribution date, you will still receive the shares of
Phillips 66 common stock that you would be entitled to receive in respect of your ownership, as of the record date, of the shares of
ConocoPhillips common stock that you sold.
Furthermore, beginning on or shortly before the record date and continuing up to and including the distribution date, we expect there will be a
“when-issued” market in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has
been authorized but not yet issued. The “when-issued” trading market will be a market for shares of Phillips 66 common stock that will be
distributed to ConocoPhillips stockholders on the distribution date. If you own shares of ConocoPhillips common stock at 5:00 p.m. Eastern
Time on the record date, you would be entitled to receive shares of our common stock in the distribution. You may trade this entitlement to
receive shares of Phillips 66 common stock, without trading the shares of ConocoPhillips common stock you own, in the “when-issued”
market. On the first trading day following the distribution date, we expect “when-issued” trading with respect to Phillips 66 common stock will
end and “regular-way” trading will begin.
Conditions to the Distribution
We expect the distribution will be effective on April 30, 2012, the distribution date, provided that, among other conditions described in the
Separation and Distribution Agreement, the following conditions shall have been satisfied or, if permissible under the Separation and
Distribution Agreement, waived by ConocoPhillips:
•
The SEC will have declared effective our registration statement on Form 10, of which this Information Statement is a part, under
the Securities Exchange Act of 1934, as amended; no order suspending the effectiveness of the registration statement shall be in
effect; and no proceedings for such purpose shall be pending before or threatened by the SEC.
•
Any required actions and filings with regard to state securities and blue sky laws of the U.S. (and any comparable laws under any
foreign jurisdictions) will have been taken and, where applicable, have become effective or been accepted.
•
The Phillips 66 common stock will have been authorized for listing on the NYSE, or another national securities exchange
approved by ConocoPhillips, subject to official notice of issuance.
•
Prior to the distribution, this Information Statement will have been mailed to the holders of ConocoPhillips common stock as of
the record date.
•
ConocoPhillips will have received a private letter ruling from the IRS in form and substance satisfactory to ConocoPhillips in its
sole discretion, to the effect the distribution, together with certain related transactions, will qualify as a reorganization for U.S.
federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code.
•
No order, injunction, decree or regulation issued by any court or agency of competent jurisdiction or other legal restraint or
prohibition preventing consummation of the distribution will be in effect.
•
Any government approvals and other material consents necessary to consummate the distribution will have been obtained and be
in full force and effect.
41
Table of Contents
The fulfillment of the foregoing conditions will not create any obligations on ConocoPhillips’ part to effect the distribution, and the
ConocoPhillips Board of Directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the distribution,
including by accelerating or delaying the timing of the consummation of all or part of the distribution, at any time prior to the distribution date.
Reason for Furnishing This Information Statement
This Information Statement is being furnished solely to provide information to ConocoPhillips stockholders who are entitled to receive shares
of our common stock in the distribution. The Information Statement is not, and is not to be construed as, an inducement or encouragement to
buy, hold or sell any of our securities. We believe the information contained in this Information Statement is accurate as of the date set forth on
the cover. Changes may occur after that date and neither ConocoPhillips nor we undertake any obligation to update such information except in
the normal course of our respective public disclosure obligations.
42
Table of Contents
DIVIDEND POLICY
After the separation, Phillips 66 intends to pay a cash dividend to its common stockholders at an initial rate of $0.20 per share per quarter, or
$0.80 per share per year, beginning in the third quarter of 2012. However, the declaration and amount of all dividends to holders of our
common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition,
earnings, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints,
industry practice and other factors the Board of Directors deems relevant. There can be no assurance we will continue to pay any dividend even
if we commence the payment of dividends.
43
Table of Contents
CAPITALIZATION
The following table sets forth (i) our historical capitalization as of December 31, 2011, and (ii) our adjusted capitalization assuming the
distribution, the incurrence of debt and other matters (as discussed in “The Separation”) was effective December 31, 2011. The table should be
read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma
Condensed Combined Financial Statements” and the historical combined financial statements and accompanying notes included elsewhere in
this Information Statement.
Millions of Dollars
December 31
Debt Outstanding
Short-term debt
Long-term debt
Total Debt
$
Net Investment/Stockholders’ Equity
Common stock
Par value
Capital in excess of par
Net parent company investment
Accumulated other comprehensive income (loss)
Noncontrolling interests
Total Net Investment/Stockholders’ Equity
Total Capitalization
$
44
2011
2011
Actual
As
Adjusted
30
361
391
598
7,409
8,007
23,142
122
29
23,293
23,684
6
17,807
(503 )
29
17,339
25,346
Table of Contents
BUSINESS AND PROPERTIES
OVERVIEW
Phillips 66 consists of the Downstream business of ConocoPhillips. Upon completion of the separation, ConocoPhillips will not retain an
ownership interest in our company. Following our separation from ConocoPhillips, we believe we will have a unique position as a large,
integrated downstream company, with operations encompassing natural gas gathering and processing, crude oil refining, petroleum products
marketing, transportation, power generation, and petrochemicals manufacturing and marketing.
We are one of the largest petroleum refiners in the United States and globally, with a domestic net crude oil processing capacity of 1.8 million
barrels per day, and a global net crude oil processing capacity of 2.2 million barrels per day. We own or have an interest in 11 currently
operating refineries in the United States (all of which we operate) and four international refineries (two of which we operate).
Our petroleum products are sold at approximately 10,000 outlets in the United States and Europe, primarily under the Phillips 66 , Conoco and
76 brands in the United States and the JET brand in Europe. Nearly all the U.S. outlets are marketer owned or supplied, while our international
operations include both company-owned and dealer-owned sites.
We own or lease various transportation assets to provide strategic, timely and environmentally safe delivery of crude oil, refined products,
natural gas and NGL. These assets include pipelines and terminals, marine and inland vessels, railcars and trucks.
Our midstream business is conducted primarily through a 50 percent equity investment in DCP Midstream, LLC (DCP Midstream), a joint
venture with Spectra Energy Corp. Headquartered in Denver, Colorado, DCP Midstream is one of the largest natural gas gatherers and
processors, NGL producers, and marketers of natural gas and natural gas by-products in the United States. DCP Midstream had approximately
$9 billion in assets and 3,000 employees across the United States as of December 31, 2011.
Our chemicals business is conducted through a 50 percent equity investment in Chevron Phillips Chemical Company LLC (CPChem), a joint
venture with Chevron Corporation. Headquartered in The Woodlands, Texas, CPChem is one of the world’s top producers of olefins and
polyolefins and a leading supplier of aromatics and styrenics. CPChem had approximately $9 billion in assets and 4,700 employees worldwide
as of December 31, 2011.
Our Business Strategies
Deliver Profitable Growth
We believe all three of our business segments have profitable growth opportunities. The use of free cash flow for investments to improve R&M
margins and expand Chemicals and Midstream capacity have the potential to deliver significant growth in earnings and returns.
In R&M, we have identified projects designed to reduce feedstock costs and improve clean product yield, which should expand gross profit
margins and ROCE. An example is the CORE project at the Wood River Refinery. This project increased heavy crude oil processing capacity,
while delivering a 5 percent improvement in clean product yield. Additionally, on an ongoing basis, we evaluate and execute R&M projects
designed to improve operating efficiency.
45
Table of Contents
We expect to have significant growth opportunities related to expanding North American natural gas and NGL production. For example, as
unconventional natural gas production grows, new opportunities are created for DCP Midstream to invest in new pipelines, natural gas
processing plants and gathering systems. In our chemicals business, we see ways to exploit low NGL feedstock costs. In March 2011, CPChem
announced plans to evaluate the construction of a world-scale ethane cracker and derivatives facility on the U.S. Gulf Coast. Internationally,
CPChem is seeking to identify new petrochemical facility investment opportunities in the Middle East and Asia.
Enhance Returns on Capital
We believe ROCE is an important metric for evaluating the quality of capital allocation decisions, and it provides a good measure of portfolio
value. ROCE is a measure of a company’s efficiency and profitability of its capital investments. ROCE is a ratio, the numerator of which is net
income plus after-tax interest expense, and the denominator is average total equity plus total debt. We will seek to increase ROCE through a
combination of portfolio optimization, investing in higher-return projects, and continuing cost discipline. Absolute ROCE improvement, as
well as improvement relative to our peers, is expected to be a key performance metric as we move forward.
Of the three business segments within Phillips 66, R&M has the highest capital employed and lowest ROCE, and thus requires further
rationalization to improve returns. We continue to evaluate opportunities to reduce refining exposure in markets where we expect to generate
below-average returns over the medium-to-longer term because of low market crack spreads. For example, we recently sold the Wilhelmshaven
Refinery in Germany and have idled and intend to sell or permanently close the Trainer Refinery in Pennsylvania. In addition to portfolio
rationalization of low-returning refining assets, we plan to improve R&M ROCE through a disciplined capital allocation process.
Conversely, we expect to increase capital investments and capital employed in more profitable and higher-returning projects in our Chemicals
and Midstream segments.
An important aspect to increasing ROCE is continued discipline in cost management. We plan to remain focused on costs, through internal
efficiency efforts, coupled with ongoing procurement initiatives with providers of goods and services. Cost control is a key aspect of our
performance evaluation and tracking.
Maintain Financial Strength
A strong balance sheet and financial flexibility are important attributes in our industry. At the time of our separation, we expect to hold an
investment-grade credit rating on our senior unsecured long-term debt and maintain sufficient cash and liquidity to allow us to invest in
high-return projects. Available cash flow in excess of capital spending and dividends can be directed toward the retirement of debt in order to
achieve and maintain a targeted debt-to-capital ratio of 20 percent to 30 percent.
Strong Stockholder Distributions
We believe a significant portion of value creation can be generated through consistent growth in regular dividends and share repurchases.
Distributions to shareholders also reinforce the focus on capital discipline by Phillips 66 management. We currently plan to pay quarterly cash
dividends at an initial rate of $0.20 per share and, subject to market conditions and other factors, increase these dividends annually at the
discretion of our Board of Directors. In addition, share repurchases will be considered after capital, dividend and debt reduction objectives are
met.
46
Table of Contents
Our Competitive Strengths
A Strong Safety and Environmental Stewardship Culture
We believe a workforce committed to continuous improvement in safety and environmental stewardship is a fundamental requirement for our
employees, our company, and the communities in which we operate. We employ rigorous training and audit programs to drive ongoing
improvement in both personal and process safety as we strive for zero incidents. We are committed to protecting the environment and
continually seek to reduce our environmental footprint throughout our operations. For example, we reduced the sulfur dioxide emission from
our refineries by 58 percent during the three-year period ended December 31, 2010, while our nitrogen oxides emissions were reduced 27
percent over the same period.
A Unique Approach to Downstream Integration
Our combination as a leading refiner with significant marketing and transportation assets, one of the largest domestic producers of NGL, and
one of the world’s top producers of petrochemicals creates a unique approach to downstream integration through earnings diversification. Our
businesses have the efficiency of scale and technical capability to compete in the most attractive markets globally. Including our equity
affiliates, our operations encompass 15 refineries with a gross crude oil capacity of 2.8 million barrels per day, 10,000 branded marketing
outlets, nearly 80,000 miles of pipeline, 7.2 billion cubic feet per day of gross natural gas processing capacity, and over 40 billion pounds of
gross annual chemicals processing capacity. We believe this positions Phillips 66 to compete with the best in the industries across the value
chain.
Geographically Diverse Refining Assets
Our 11 operated U.S. refineries are located across all five Petroleum Administration for Defense Districts (PADDs). This regional diversity
enables us to participate in market opportunities as they occur in every U.S. geographic region. The level of transportation, marketing and
commercial integration varies in each PADD, depending on need, and provides our refineries with dependable supply of crude oil from
domestic, Canadian and other international sources. We have nearly 500,000 barrels per day of net refining capacity in four refineries in the
Midcontinent region, where we currently benefit from strong margins because of low feedstock costs due to increasing onshore crude oil
production. Internationally, we own or hold interests in three refineries in Europe and one in Asia. These include our 100 percent-owned
Humber Refinery in the United Kingdom, one of the most sophisticated refining assets in Europe. Humber is a fully integrated facility that
produces a high portion of transportation fuels, such as gasoline and diesel fuel. Our Immingham Combined Heat and Power Plant in the
United Kingdom provides steam and electricity to the Humber Refinery, as well as merchant power into the U.K. market.
Ability to Process a Variety of Crude Oil Types While Maintaining High Yields
Extensive transportation and logistics assets and commercial capabilities support our refineries, allowing the delivery of crude oil feedstock
from multiple domestic, Canadian and international sources of supply. Our refineries can process a wide range of crude oils, including
lower-priced heavy and sour crudes. Clean product yield is the percentage of higher-margin products (such as gasoline, distillate, aromatics,
lubricants and chemical feedstocks) produced from processed crude oil and other purchased raw materials. In 2011, our refineries delivered
clean product yields of 84 percent, a 1 percent improvement over 2010. Our commercial capabilities include supply and trading operations
experienced in sourcing crude and marketing refined products globally.
Low-Cost Marketing Operations
Our global marketing strategy is to provide sustainable, low-cost and ratable demand for our refining network’s products. In the United States,
we supply gasoline, diesel fuel and aviation fuel to approximately 8,250 marketer-owned or -supplied outlets in 49 states under three domestic
brands— Phillips 66 , Conoco and 76 . This strong branded wholesale business is supported by long-term supply agreements with marketers. In
Europe, we hold a niche marketing position through our ability to leverage our JET brand and
47
Table of Contents
provide a low-cost, well-established infrastructure. This network allows us to deliver a very competitive gasoline and diesel fuel brand with a
premier retail offering.
Extensive Transportation Assets
Our domestic transportation business includes 15,000 miles of pipelines under management, including crude oil, petroleum product and NGL
pipelines; 42 finished product terminals, 8 liquefied petroleum gas terminals, 5 crude oil terminals and 1 coke exporting facility; an extensive
fleet of marine and inland vessels under charter; and truck and rail assets. This transportation business supports our refining system and efforts
to optimize refined product distribution, resulting in economies of scale that contribute to profitability.
DCP—A High-Growth Midstream Business
We conduct our midstream business primarily through a 50 percent equity investment in DCP Midstream. DCP Midstream is a leader in its
sector as one of the largest natural gas gatherers and processors, NGL producers, and NGL marketers in the United States. DCP Midstream’s
extensive asset base is located in many of the legacy natural gas producing regions of the United States, including the Rocky Mountains,
Midcontinent, Permian, East Texas/North Louisiana, South Texas, Central Texas and the Gulf Coast. In addition, DCP Midstream is entering
high-growth regions of the United States, including the Niobrara, Eagle Ford shale, Barnett shale, and Granite Wash regions, allowing for
substantial growth opportunities. DCP Midstream’s assets include 62,000 miles of pipelines, 61 gas processing plants and 12 NGL
fractionators.
In 2010, DCP Midstream signed agreements that will enable it to become the anchor shipper of growing Eagle Ford shale gas production on a
portion of the Trunkline Gas pipeline system. DCP Midstream is also planning construction of the Sand Hills Pipeline to provide NGL
transportation capacity for producers in the Permian and Eagle Ford basins to gain access to market centers along the Gulf Coast.
CPChem—A High-Returning Petrochemicals Company
We conduct our chemicals business through a 50 percent equity investment in CPChem. CPChem has a number of large petrochemical
facilities in the U.S. Gulf Coast region, and has significant international operations through its investments in feedstock-advantaged areas in the
Middle East, with access to large, growing markets for its products, such as Asia. CPChem is one of the world’s top producers of olefins and
polyolefins and a leading supplier of aromatics and styrenics. Our investment in CPChem has generated high returns in recent years, with a
2010 ROCE of 21 percent and a 2011 ROCE of 28 percent. CPChem is analyzing a number of additional growth projects globally, including
proposed construction of a world-scale ethane cracker and two polyethylene facilities at or near one or more of CPChem’s Texas Gulf Coast
sites. With an expected annual capacity of 3.3 billion pounds, the ethane cracker would, if progressed, increase CPChem’s U.S. ethylene
capacity by over 40 percent and allow CPChem to leverage the development of significant shale gas resources in the United States.
SEGMENT AND GEOGRAPHIC INFORMATION
For operating segment and geographic information, see Note 21—Segment Disclosures and Related Information, in the Combined Financial
Statements, and incorporated herein by reference.
Our business is organized into three operating segments:
•
R&M— This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States,
Europe and Asia; and also engages in power generation activities.
•
Midstream— This segment gathers, processes, transports and markets natural gas and fractionates and markets NGL,
predominantly in the United States. The Midstream segment primarily consists of our 50 percent equity investment in DCP
Midstream.
48
Table of Contents
•
Chemicals— This segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment
consists of our 50 percent equity investment in CPChem.
R&M
Our R&M segment primarily refines crude oil and other feedstocks into petroleum products (such as gasolines, distillates and aviation fuels);
buys, sells and transports crude oil; and buys, transports, distributes and markets petroleum products. This segment also engages in power
generation activities. R&M has operations in the United States, Europe and Asia.
R&M—UNITED STATES
Refining
The table below depicts information for each of our U.S. refineries at December 31, 2011:
Thousands of Barrels Daily
Refinery
East Coast Region
Bayway
Trainer*
Location
Linden, NJ
Trainer, PA
Net Crude
Throughput
Capacity
Interest
100 %
100
238
-
Clean
Product
Yield
Capability
Clean Product
Capacity***
Gasolines
Distillates
145
-
115
-
90 %
-
125
90
130
120
115
120
86
69
87
83
50
105
35
45
25
80
25
80
89
91
89
238
Gulf Coast Region
Alliance
Lake Charles
Sweeny
Belle Chasse, LA
Westlake, LA
Old Ocean, TX
100
100
100
247
239
247
733
Central Region
Wood River**
Borger**
Ponca City
Billings
Roxana, IL
Borger, TX
Ponca City, OK
Billings, MT
50
50
100
100
153
73
187
58
471
West Coast Region
Ferndale
Los Angeles
San Francisco
Ferndale, WA
Carson/ Wilmington,
CA
Arroyo Grande/
San Francisco, CA
100
100
55
30
75
100
139
80
65
87
100
120
55
55
83
359
1,801
*Net
throughput capacity of 185,000 barrels per day was idled effective October 1, 2011.
**Represents
our proportionate share.
*** Cleanproduct capacities are maximum rates for each clean product category, independent of each other. They are not additive when calculating the clean product yield capability for
each refinery.
49
Table of Contents
Primary crude oil characteristics and sources of crude oil for our U.S. refineries are as follows:
Sweet
Characteristics
Medium
Sour
Heavy
Sour
High
TAN *
United
States
Canada
Sources
South
America
Europe
& FSU **
Middle East
& Africa
Bayway




Alliance



Lake Charles












Sweeny



Wood River


















Borger
Ponca City


Billings
Ferndale


Los Angeles










San Francisco


*High TAN (Total Acid Number): acid content greater than or equal to 1.0 milligram of potassium hydroxide (KOH) per gram.
**Former Soviet Union.
East Coast Region
Bayway Refinery
The Bayway Refinery is located on the New York Harbor in Linden, New Jersey. Bayway refining units include one of the world’s largest fluid
catalytic cracking units, two hydrodesulfurization units, a reformer, alkylation unit and other processing equipment. The refinery produces a
high percentage of transportation fuels, such as gasoline, diesel and jet fuel, as well as petrochemical feedstocks, residual fuel oil and home
heating oil. Refined products are distributed to East Coast customers by pipeline, barge, railcar and truck. The complex also includes a
775-million-pound-per-year polypropylene plant.
Trainer Refinery
The Trainer Refinery is located on the Delaware River in Trainer, Pennsylvania. Refinery facilities include fluid catalytic cracking units,
hydrodesulfurization units, a reformer and a hydrocracker. In September 2011, ConocoPhillips announced its intention to sell the refinery and
associated pipelines and terminals. ConocoPhillips idled the facility effective October 1, 2011, and plans to permanently close the plant by the
end of the first quarter of 2012 if a sales transaction is unsuccessful. At the end of January 2012, employee transfers and severances were
completed. A small caretaker crew remains at the refinery.
Gulf Coast Region
Alliance Refinery
The Alliance Refinery is located on the Mississippi River in Belle Chasse, Louisiana. The single-train facility includes fluid catalytic cracking
units, hydrodesulfurization units and a reformer and aromatics unit. Alliance produces a high percentage of transportation fuels, such as
gasoline, diesel and jet fuel. Other products include petrochemical feedstocks, home heating oil and anode petroleum coke. The majority of the
refined products are distributed to customers in the southeastern and eastern United States through major common-carrier pipeline systems and
by barge.
50
Table of Contents
Lake Charles Refinery
The Lake Charles Refinery is located in Westlake, Louisiana. Its facilities include crude distillation, fluid catalytic cracker, hydrocracker,
delayed coker and hydrodesulfurization units. The refinery produces a high percentage of transportation fuels, such as gasoline, off-road diesel
and jet fuel, along with home heating oil. The majority of its refined products are distributed by truck, railcar, barge or major common-carrier
pipelines to customers in the southeastern and eastern United States. Refined products can also be sold into export markets through the
refinery’s marine terminal. Refinery facilities also include a specialty coker and calciner, which produce graphite petroleum coke for the steel
industry.
Excel Paralubes
We own a 50 percent interest in Excel Paralubes, a joint venture which owns a hydrocracked lubricant base oil manufacturing plant located
adjacent to the Lake Charles Refinery. The facility produces approximately 20,000 barrels per day of high-quality, clear hydrocracked base
oils.
Sweeny Refinery
The Sweeny Refinery is located in Old Ocean, Texas, approximately 65 miles southwest of Houston. Refinery facilities include fluid catalytic
cracking, delayed coking, alkylation, a continuous regeneration reformer and hydrodesulfurization units. The refinery receives crude oil via
tankers, primarily through wholly and jointly owned terminals on the Gulf Coast, including a deepwater terminal at Freeport, Texas. It
produces a high percentage of transportation fuels, such as gasoline, diesel and jet fuel. Other products include petrochemical feedstocks, home
heating oil and coke. The refinery operates nearby terminals and storage facilities in Freeport, Jones Creek and on the San Bernard River, along
with pipelines that connect these facilities to the refinery. Refined products are distributed throughout the Midwest and southeastern United
States by pipeline, barge and railcar.
MSLP
Merey Sweeny, L.P. (MSLP) owns a delayed coker and related facilities at the Sweeny Refinery. MSLP processes long residue, which is
produced from heavy sour crude oil, for a processing fee. Fuel-grade petroleum coke is produced as a by-product and becomes the property of
MSLP. Prior to August 28, 2009, MSLP was owned 50/50 by ConocoPhillips and Petróleos de Venezuela S.A. (PDVSA). Under the
agreements that govern the relationships between the partners, certain defaults by PDVSA with respect to supply of crude oil to the Sweeny
Refinery gave ConocoPhillips the right to acquire PDVSA’s 50 percent ownership interest in MSLP, which was exercised on August 28, 2009.
PDVSA has initiated arbitration with the International Chamber of Commerce challenging the exercise of the call right and claiming it was
invalid. The arbitral tribunal is scheduled to hold hearings on the merits of the dispute in December 2012.
In connection with the separation and distribution, it is expected that the relevant ConocoPhillips subsidiaries will transfer all interests of
ConocoPhillips and its subsidiaries in the joint venture and the Sweeny Refinery to Phillips 66 subsidiaries and Phillips 66 will fully guarantee
certain outstanding MSLP debt. Following the separation and distribution, in addition to the foregoing guarantee, Phillips 66 generally will
indemnify ConocoPhillips for liabilities, if any, arising out of the exercise of the call right or otherwise with respect to the joint venture or the
refinery.
Sweeny Cogeneration
We own a 50 percent operating interest in Sweeny Cogeneration, a joint venture which owns a simple cycle, cogeneration power plant located
adjacent to the Sweeny Refinery. The plant generates electricity and provides process steam to the refinery, and it also provides merchant
power into the Texas market. The plant has a net electrical output of 440 megawatts and is capable of generating up to 3.6 million pounds per
hour of process steam.
51
Table of Contents
Central Region
WRB
In 2007, ConocoPhillips entered into two 50/50 business ventures with Cenovus Energy Inc. to create an integrated North American heavy oil
business: a Canadian upstream general partnership, FCCL Partnership, and a U.S. downstream limited partnership, WRB Refining LP.
ConocoPhillips will retain its interest in FCCL Partnership, while ConocoPhillips’ interest in WRB will form part of the Downstream business
to be contributed to us in the separation. We are the operator and managing partner of WRB, which consists of the Wood River and Borger
refineries.
WRB’s processing capability of heavy Canadian or similar crudes was 145,000 barrels per day, after startup of the Keystone pipeline and prior
to the finalization of the CORE Project at the Wood River Refinery. We have completed the CORE Project, and operational startup occurred in
the fourth quarter of 2011. Test runs of the CORE Project have been successful to date and will continue through the first quarter of 2012.
Upon completion of testing, total processing capability of heavy Canadian or similar crudes within WRB will be dependent on the quality of
heavy crudes that are economically available, and is expected to range between 235,000 and 255,000 barrels per day.
•
Wood River Refinery
The Wood River Refinery is located in Roxana, Illinois, about 15 miles northeast of St. Louis, Missouri, at the convergence of the
Mississippi and Missouri rivers. Operations include three distilling units, two fluid catalytic cracking units, hydrocracking, coking,
reforming, hydrotreating and sulfur recovery. The refinery produces a high percentage of transportation fuels, such as gasoline, diesel
and jet fuel. Other products include petrochemical feedstocks, asphalt and coke. Finished product leaves Wood River by pipeline,
rail, barge and truck. The CORE Project has resulted in an increased clean product yield of 5 percent. Gross heavy crude oil capacity
is expected to increase between 90,000 to 110,000 barrels per day, dependent on the quality of available heavy crudes. The majority
of the existing asphalt production at Wood River will be replaced with production of upgraded products.
•
Borger Refinery
The Borger Refinery is located in Borger, Texas, in the Texas Panhandle, approximately 50 miles north of Amarillo. The refinery
facilities are comprised of coking, fluid catalytic cracking, hydrodesulfurization and naphtha reforming, in addition to a
45,000-barrels-per-day NGL fractionation facility. It produces a high percentage of transportation fuels, such as gasoline, diesel and
jet fuel, as well as coke, NGL and solvents. Refined products are transported via pipelines from the refinery to West Texas, New
Mexico, Colorado and the Midcontinent region.
In connection with the separation, we have entered into a put agreement and a feedstock right of first offer agreement with Cenovus. Under the
put agreement, if Cenovus suffers a transportation constraint it cannot mitigate which threatens to shut in FCCL production, we will be required
to purchase FCCL-produced crude oil from Cenovus, subject to a maximum daily volume amount and provided we have pipeline capacity
available after meeting any other contractual obligations, at a price equal to the lower of fair market value or the “break even value” of such
crude oil compared to other crude oils that could be processed at one of our refineries. Under the feedstock right of first offer agreement, if we
determine to enter into a six-month or longer term agreement to acquire Canadian crude oil for the Wood River Refinery or the Borger
Refinery, we will be required to first notify Cenovus and offer Cenovus the opportunity to supply FCCL-produced crude oil according to the
specified terms.
52
Table of Contents
Ponca City Refinery
The Ponca City Refinery is located in Ponca City, Oklahoma. It is a high-conversion facility which includes fluid catalytic cracking, delayed
coking and hydrodesulfurization units. It produces a full range of products, including gasoline, diesel, jet fuel, liquefied petroleum gas (LPG)
and anode-grade petroleum coke. Finished petroleum products are primarily shipped by company-owned and common carrier pipelines to
markets throughout the Midcontinent region.
Billings Refinery
The Billings Refinery is located in Billings, Montana. Its facilities include fluid catalytic cracking and hydrodesulfurization units, in addition to
a delayed coker, which converts heavy, high-sulfur residue into higher value light oils. The refinery produces a high percentage of
transportation fuels, such as gasoline, diesel and aviation fuels, as well as fuel-grade petroleum coke. Finished petroleum products from the
refinery are delivered by pipeline, railcar and truck. The pipelines transport most of the refined products to markets in Montana, Wyoming,
Utah and Washington.
West Coast Region
Ferndale Refinery
The Ferndale Refinery is located on Puget Sound in Ferndale, Washington, approximately 20 miles south of the U.S.-Canada border. Facilities
include a fluid catalytic cracker, an alkylation unit, a diesel hydrotreater and an S-Zorb™ unit. The refinery produces transportation fuels such
as gasoline and diesel. Other products include residual fuel oil, which supplies the northwest marine transportation market. Most refined
products are distributed by pipeline and barge to major markets in the northwest United States.
Los Angeles Refinery
The Los Angeles Refinery consists of two linked facilities located about five miles apart in Carson and Wilmington, California, approximately
15 miles southeast of Los Angeles International Airport. Carson serves as the front end of the refinery by processing crude oil, and Wilmington
serves as the back end by upgrading the intermediate products to finished products. The refinery produces a high percentage of transportation
fuels, such as gasoline, diesel and jet fuel. Other products include fuel-grade petroleum coke. The refinery produces California Air Resources
Board (CARB)-grade gasoline by blending ethanol to meet government-mandated oxygenate requirements. Refined products are distributed to
customers in California, Nevada and Arizona by pipeline and truck.
San Francisco Refinery
The San Francisco Refinery consists of two facilities linked by a 200-mile pipeline. The Santa Maria facility is located in Arroyo Grande,
California, about 200 miles south of San Francisco, while the Rodeo facility is in the San Francisco Bay Area. Semi-refined liquid products
from the Santa Maria facility are sent by pipeline to the Rodeo facility for upgrading into finished petroleum products. The refinery produces a
high percentage of transportation fuels, such as gasoline, diesel and jet fuel. Other products include petroleum coke. It also produces
CARB-grade gasoline by blending ethanol to meet government-mandated oxygenate requirements. The majority of the refined products are
distributed by pipeline, railcar and barge to customers in California.
Marketing
In the United States, as of December 31, 2011, we marketed gasoline, diesel and aviation fuel through approximately 8,250 marketer-owned or
-supplied outlets in 49 states. The majority of these sites utilize the Phillips 66 , Conoco or 76 brands.
53
Table of Contents
Wholesale
At December 31, 2011, our wholesale operations utilized a network of marketers operating approximately 6,875 outlets that provided refined
product offtake from our refineries. We have placed a strong emphasis on the wholesale channel of trade because of its lower capital
requirements. In addition, we held brand-licensing agreements with approximately 500 sites. Our refined products are marketed on both a
branded and unbranded basis.
In addition to automotive gasoline and diesel, we produce and market aviation gasoline, which is used by smaller piston engine aircrafts. At
December 31, 2011, aviation gasoline and jet fuel were sold through dealers and independent marketers at approximately 875 Phillips 66
-branded locations in the United States.
Retail
In 2006, we announced plans to divest approximately 830 of our U.S. company-owned outlets. This program was completed in 2010. In
addition, in June 2010, we sold our interest in CFJ Properties, a joint venture which owned and operated 110 Flying J -branded truck travel
plazas.
Lubricants
We manufacture and sell automotive, commercial and industrial lubricants which are marketed worldwide under the Phillips 66, Conoco, 76
and Kendall brands, as well as other private label brands. We also manufacture Group II and import Group III base oils and market both
globally under the respective brand names Pure Performance and Ultra-S .
Premium Coke & Polypropylene
We manufacture and market high-quality graphite and anode-grade petroleum cokes in the United States and Europe for use in the global steel
and aluminum industries. We also manufacture and market polypropylene to North America under the COPYLENE brand name. Our ThruPlus
Delayed Coker Technology, a proprietary process for upgrading heavy oil into higher value, light hydrocarbon liquids, was sold in June 2011.
Transportation
We own or lease various assets to provide strategic, timely and environmentally safe delivery of crude oil, refined products, natural gas and
NGL. These assets include pipeline systems; petroleum product, crude oil and LPG terminals; a petroleum coke handling facility; a fleet of
marine vessels; and a fleet of railcars.
Pipelines and Terminals
At December 31, 2011, R&M managed approximately 15,000 miles of common-carrier crude oil, raw NGL, natural gas and petroleum
products pipeline systems in the United States, including those partially owned or operated by affiliates (other than DCP Midstream). We
owned or operated 42 finished product terminals, 8 liquefied petroleum gas terminals, 5 crude oil terminals and 1 petroleum coke exporting
facility.
In October 2011, we sold Seaway Products Pipeline Company to DCP Midstream. In December 2011, we sold our 16.55 percent equity interest
in Colonial Pipeline Company and our 50 percent equity interest in Seaway Crude Pipeline Company.
54
Table of Contents
The following table depicts our ownership interest in major pipeline systems as of December 31, 2011:
Name
Crude
Coast and Valley System
Clifton Ridge
Cushing
WA Line
Oklahoma Mainline/CPL
Line O
Line 80
Glacier
Origination/Terminus
Interest
Size
Miles
Capacity
MBD
Central CA/Bay Area, CA
Westlake, Equillon, Pecan Grove, LA
Cushing, OK/Ponca City, OK
Odessa, TX/Borger, TX
Wichita Falls, TX/Ponca City, OK
Cushing, OK/Borger, TX
Gaines, TX/Borger, TX
Cut Bank, MT/Billings, MT
100
100
100
100
100
100
100
79
8”-12”
12”-20”
18”
12”-14”
12”
10”
8”, 12”
8”-10”-12”
558
11
62
289
217
276
232
865
307
270
130
118
100
37
33
100
100
100
100
100
100
100
100
100
70
50
50
50
50
46
33
12”, 18”
8”-16”
18”
8”, 10”
10”-12”
8”
8”-10”
8”
8”, 12”
8”, 12”
6”, 10”
8”, 6”
8”
6”-10”
16”
120
681
92
93
248
90
105
342
405
306
293
49
571
710
80
264
120
80
76
45
46
55
33
38
63
20
30
29
66
104
Explorer
Sweeny, TX/Pasadena, TX
Borger, TX/St. Louis, IL
Marland Junction, OK/Wichita, KS
Borger, TX/Amarillo, TX
Ponca City, OK/Mt. Vernon, MO
Ponca City, OK/Okla. City, OK
Ponca City, OK/Wichita, KS
Billings, MT/Sinclair, WY
McKee, TX/Denver, CO
Sinclair, WY/Salt Lake City, UT
Amarillo, TX/Albuquerque, NM
McPherson, KS/Des Moines, IA
Skellytown, TX/Mont Belvieu, TX
Billings, MT/Spokane, WA
Woodbury, NJ/Linden, NJ
Amarillo, TX/Amarillo and
Lubbock, TX
Texas Gulf Coast/Chicago, IL
33
14
6”
24”, 28”
121
1,885
18
500
NGL
Line EZ
Blue Line
Powder River
Chisholm
Rankin, TX/Sweeny, TX
Borger, TX/St. Louis, IL
Douglas, WY/Borger, TX
Kingfisher, OK/Conway, KS
100 *
100
50
100
10”
8”-12”
6”-8”
8”-10”
434
666
695
185
101
29
19
42
LPG
Medford PBC
Conway to Wichita
Ponca City, OK/Medford, OK
Conway, KS/Wichita, KS
100
100
4”-12”
12”
81
55
60
38
Petroleum Product
Sweeny to Pasadena
Gold Line
Standish
Borger to Amarillo
Wood River
Okla. City/Cherokee 8”
Wichita/Ark City 1&2
Seminoe
Borger-Denver
Pioneer
ATA Line
Heartland
Skelly-Belvieu
Yellowstone
Harbor
SAAL
*100% interest held by CPChem. Operated by Phillips 66.
55
Table of Contents
Tankers
At December 31, 2011, we utilized 15 double-hulled crude oil tankers that we chartered, with capacities ranging in size from 713,000 to
2,100,000 barrels. These tankers are primarily used to transport feedstocks to certain of our U.S. refineries. In addition, we utilized five
double-hulled petroleum product tankers, with capacities ranging from 315,000 to 332,000 barrels, to transport our heavy and clean products.
Truck and Rail
Truck and rail operations are managed on behalf of U.S. refinery and specialty operations. Rail movements are provided via a diverse fleet of
more than 8,500 owned and leased railcars. Truck movements are provided through approximately 150 third-party truck companies, as well as
through Sentinel Transportation LLC, in which we hold an equity interest.
Specialty Businesses
We manufacture and sell a variety of specialty products including pipeline flow improvers and anode material for high-power lithium-ion
batteries. Our specialty products are marketed under the LiquidPower and CPreme brand names.
R&M—INTERNATIONAL
Refining
We own or have an interest in four refineries outside the United States.
Thousands of Barrels Daily
Refinery
Humber
Whitegate
MiRO*
Melaka**
Location
N. Lincolnshire,
United Kingdom
Cork, Ireland
Karlsruhe, Germany
Melaka, Malaysia
Net Crude
Throughput
Capacity
Interest
100.00 %
100.00
18.75
47.00
221
71
58
76
Clean Product
Capacity***
Gasolines
Distillates
85
15
25
20
115
30
25
50
Clean
Product
Yield
Capability
81 %
65
85
80
426
*Mineraloelraffinerie
Oberrhein GmbH.
**Capacity
increased to 80,000 barrels per day effective January 1, 2012.
***Cleanproduct capacities are maximum rates for each clean product category, independent of each other. They are not additive when calculating the clean product yield capability for each
refinery.
Primary crude oil characteristics and sources of crude oil for our international refineries are as follows:
Humber
Whitegate
MiRO
Melaka
Sweet




Characteristics
Medium
Heavy
Sour
Sour




High
TAN*


*High TAN (Total Acid Number): acid content greater than or equal to 1.0 milligram of potassium hydroxide (KOH) per gram.
**Former Soviet Union.
56
Sources
Europe
Middle East
& FSU**
& Africa






Table of Contents
Humber Refinery
The Humber Refinery is located on the east coast of England in North Lincolnshire, United Kingdom. It is a fully integrated refinery which
produces a high percentage of transportation fuels, such as gasoline and diesel. Humber’s facilities encompass fluid catalytic cracking, thermal
cracking and coking. The refinery has two coking units with associated calcining plants, which upgrade the heaviest part of the crude barrel and
imported feedstocks into light oil products and high-value graphite and anode petroleum cokes. Humber is the only coking refinery in the
United Kingdom and is one of the world’s largest producers of specialty graphite cokes and one of Europe’s largest anode coke producers.
Approximately 60 percent of the light oils produced in the refinery are marketed in the United Kingdom, while the other products are exported
to the rest of Europe and the United States.
Immingham Combined Heat and Power Plant
The Immingham Combined Heat and Power Plant is a wholly owned 1,180-megawatt facility in the United Kingdom, which provides steam
and electricity to the Humber Refinery and steam to a neighboring refinery, as well as merchant power into the U.K. market.
Whitegate Refinery
The Whitegate Refinery is located in Cork, Ireland, and is Ireland’s only refinery. The refinery primarily produces transportation fuels, such as
gasoline, diesel and fuel oil, which are distributed to the inland market, as well as being exported to Europe and the United States. We also
operate a crude oil and products storage complex consisting of 7.5 million barrels of storage capacity and an offshore mooring buoy, located in
Bantry Bay, about 80 miles southwest of the refinery in southern Cork County.
MiRO Refinery
The Mineraloelraffinerie Oberrhein GmbH (MiRO) Refinery, located on the Rhine River in Karlsruhe in southwest Germany, is a joint venture
in which we own an 18.75 percent interest. Facilities include three crude unit trains, fluid catalytic cracking, petroleum coking and calcining,
hydrodesulfurization units, reformers, isomerization and aromatics recovery units, ethyl tert-butyl ether (ETBE) and alkylation units. MiRO
produces a high percentage of transportation fuels, such as gasoline and diesel. Other products include petrochemical feedstocks, home heating
oil, bitumen, and anode- and fuel-grade petroleum coke. Refined products are delivered to customers in southwest Germany, northern
Switzerland and western Austria by truck, railcar and barge.
Melaka Refinery
The Melaka Refinery in Melaka, Malaysia, is a joint venture refinery in which we own a 47 percent interest. Melaka produces a full range of
refined petroleum products and capitalizes on coking technology to upgrade low-cost feedstocks into higher-margin products. An expansion
project was completed during 2010 to increase crude oil conversion and treating unit capacities. Our share of refined products is transported by
tanker and marketed in Malaysia and other Asian markets.
Wilhelmshaven Refinery
The Wilhelmshaven Refinery is located in the northern state of Lower Saxony in Germany, and has a 260,000 barrels-per-day crude oil
processing capacity. In August 2011, we sold the refinery, tank farm and marine terminal.
Yanbu
In May 2006, we signed a Memorandum of Understanding with the Saudi Arabian Oil Company to conduct a detailed evaluation of a proposed
development of a 400,000-barrel-per-day, full-conversion refinery in Yanbu, Saudi Arabia. We ended our participation in the project in the first
quarter of 2010.
57
Table of Contents
Marketing
We have marketing operations in five European countries. Our European marketing strategy is to sell primarily through owned, leased or joint
venture retail sites using a low-cost, high-volume approach. We use the JET brand name to market retail and wholesale products in Austria,
Germany and the United Kingdom. In addition, a joint venture in which we have an equity interest markets products in Switzerland under the
Coop brand name.
We also market aviation fuels, LPG, heating oils, transportation fuels, marine bunker fuels, bitumen plus fuel coke specialty products to
commercial customers and into the bulk or spot market in the above countries and Ireland.
In 2006, we announced our intention to sell some of our non-strategic marketing businesses. As a result, during 2007, we sold 377 of our
fueling stations located in six European countries and completely divested our marketing operations in Thailand and Malaysia. During 2008 we
sold our Norway, Sweden and Denmark marketing assets.
As of December 31, 2011, we had approximately 1,430 marketing outlets in our European operations, of which approximately 900 were
company-owned and 330 were dealer-owned. We also held brand-licensing agreements with approximately 200 sites. Through our joint
venture operations in Switzerland, we also have interests in 250 additional sites.
MIDSTREAM
The Midstream segment purchases raw natural gas from producers, including ConocoPhillips, and gathers natural gas through extensive
pipeline gathering systems. The natural gas is then processed to extract NGL. The remaining “residue” gas is marketed to electrical utilities,
industrial users and gas marketing companies. Most of the NGL are fractionated—separated into individual components such as ethane, butane
and propane—and marketed as chemical feedstock, fuel or refinery blendstock. Total NGL extracted in 2011, including our share of DCP
Midstream, was 192,000 barrels per day, compared with 184,000 barrels per day in 2010.
DCP Midstream
Our Midstream segment is primarily conducted through our 50 percent equity investment in DCP Midstream, which is headquartered in
Denver, Colorado. DCP Midstream owns or operates 61 natural gas processing facilities, with a gross inlet capacity of 7.2 billion cubic feet per
day of natural gas. Its natural gas pipeline systems include gathering services for these facilities, as well as natural gas transmission, and totals
approximately 62,000 miles of pipeline. DCP Midstream also owns or operates 12 NGL fractionation plants, along with propane terminal
facilities and NGL pipeline assets.
In 2011, DCP Midstream’s raw natural gas throughput averaged 6.1 billion cubic feet per day, and NGL extraction averaged
383,000 barrels per day, compared with 6.1 billion cubic feet per day and 369,000 barrels per day in 2010. DCP Midstream’s assets are
primarily located in the following natural gas producing regions of the United States: Rocky Mountains, Midcontinent, Permian, East
Texas/North Louisiana, South Texas, Central Texas and Gulf Coast.
58
Table of Contents
The residual natural gas, primarily methane, which results from processing raw natural gas, is sold by DCP Midstream at market-based prices
to marketers and end-users. End-users include large industrial companies, natural gas distribution companies and electric utilities. DCP
Midstream purchases or takes custody of substantially all of its raw natural gas from producers, principally under the following types of
contractual arrangements:
•
Percentage-of-proceeds arrangements. In general, DCP Midstream purchases natural gas from producers, transports and processes
it and then sells the residue natural gas and NGL in the market. The payment to the producer is an agreed upon percentage of the
proceeds from those sales. DCP Midstream’s revenues from these arrangements correlate directly with the prices of natural gas,
crude oil and NGL. More than 70 percent of the natural gas volumes gathered and processed is under percentage-of-proceeds
contracts.
•
Fee-based arrangements. DCP Midstream receives a fee for the various services it provides, including gathering, compressing,
treating, processing or transporting natural gas. The revenue DCP Midstream earns from these arrangements is directly related to the
volume of natural gas that flows through its systems and is not directly dependent on commodity prices.
•
Keep-whole and wellhead purchase arrangement. DCP Midstream gathers or purchases raw natural gas from producers for
processing and then markets the NGL. DCP Midstream keeps the producer whole by returning an equivalent amount of natural gas
after the processing is complete. DCP Midstream is exposed to the price difference between NGL and natural gas prices,
representing the theoretical gross margin for processing liquids from natural gas.
DCP Midstream markets a portion of its NGL to us and CPChem under a supply agreement whose volume commitments remain steady until
December 31, 2014. This purchase commitment is on an “if-produced, will-purchase” basis and is expected to have a relatively stable purchase
pattern over the remaining term of the contract. Under the agreement, NGL is purchased at various published market index prices, less
transportation and fractionation fees.
DCP Midstream is constructing a natural gas processing plant in the Eagle Ford shale area of Texas. The plant, named the Eagle Plant, is
expected to have a capacity of 200 million cubic feet per day and be accompanied by related natural gas liquids infrastructure. The Eagle Plant
is projected to be online in the third quarter of 2012 and would increase DCP Midstream’s total natural gas processing capacity in the area to
1 billion cubic feet per day.
DCP Midstream is building a major new NGL pipeline in Texas. The Sand Hills Pipeline is designed to provide new NGL transportation
capacity from the Permian Basin and Eagle Ford shale area to markets in the Gulf Coast. The pipeline’s initial capacity is expected to be
200,000 barrels per day, with expansion to 350,000 barrels per day possible. The pipeline will be phased into service, with completion of the
first phase expected by the third quarter of 2012 to accommodate DCP Midstream’s growing Eagle Ford liquids volumes. Service from the
Permian Basin could be available as soon as the third quarter of 2013.
Rockies Express Pipeline LLC (REX)
We have a 25 percent interest in REX. The REX natural gas pipeline runs 1,679 miles from Cheyenne, Colorado, to Clarington, Ohio, and has a
natural gas transmission capacity of 1.8 billion cubic feet per day, with most of its system having a pipeline diameter of 42 inches. Numerous
compression facilities support the pipeline system. The REX pipeline is designed to enable natural gas producers in the Rocky Mountains
region to deliver natural gas supplies to the Midwest and eastern regions of the United States.
59
Table of Contents
Other Midstream
Outside of DCP Midstream and REX, our U.S. natural gas and NGL business includes the following:
•
A 22.5 percent equity interest in Gulf Coast Fractionators, which owns an NGL fractionation plant in Mont Belvieu, Texas. We
operate the facility, and our net share of capacity is 24,300 barrels per day. In October 2010, Gulf Coast Fractionators announced
plans to expand the capacity of its fractionation facility to 145,000 barrels per day. The expansion is expected to be operational in
the second quarter of 2012.
•
A 40 percent interest in a fractionation plant in Conway, Kansas. Our net share of capacity is 43,200 barrels per day.
•
A 12.5 percent equity interest in a fractionation plant in Mont Belvieu, Texas. Our net share of capacity is 26,000 barrels per day.
•
Marketing operations that optimize the flow of NGL and market propane on a wholesale basis.
CHEMICALS
The Chemicals segment consists of our 50 percent equity investment in CPChem, which is headquartered in The Woodlands, Texas. At the end
of 2011, CPChem owned or had joint-venture interests in 38 manufacturing facilities and four research and technical centers around the world.
CPChem’s business is structured around two primary operating segments: Olefins & Polyolefins (O&P) and Specialties, Aromatics & Styrenics
(SA&S). The O&P segment produces and markets ethylene, propylene, and other olefin products, which are primarily consumed within
CPChem for the production of polyethylene, normal alpha olefins, polypropylene and polyethylene pipe. The SA&S segment manufactures and
markets aromatics products, such as benzene, styrene, paraxylene and cyclohexane, as well as polystyrene and styrene-butadiene copolymers.
SA&S also manufactures and/or markets a variety of specialty chemical products including organosulfur chemicals, solvents, catalysts, drilling
chemicals, mining chemicals and high-performance engineering plastics and compounds.
The manufacturing of petrochemicals and plastics involves the conversion of hydrocarbon-based raw material feedstock into higher value
products, often through a thermal process referred to in the industry as “cracking.” For example, ethylene can be produced from cracking the
feedstocks ethane, propane, butane, natural gasoline or certain refinery liquids, such as naphtha and gas oil. The produced ethylene has a
number of uses, primarily as a raw material for the production of plastics, such as polyethylene and polyvinyl chloride. Plastic resins, such as
polyethylene, are manufactured in a thermal/catalyst process, and the produced output is used as a further feedstock for various applications,
such as packaging and plastic pipe.
CPChem, through its subsidiaries and equity affiliates, has manufacturing facilities located in Belgium, China, Colombia, Qatar, Saudi Arabia,
Singapore, South Korea and the United States.
60
Table of Contents
The following table reflects CPChem’s petrochemicals and plastics product capacities at December 31, 2011:
Millions of Pounds per Year
U.S.
Worldwide
O&P
Ethylene
Propylene
High-density polyethylene
Low-density polyethylene
Linear low-density polyethylene
Polypropylene*
Normal alpha olefins
Polyalphaolefins
Polyethylene pipe
7,830
2,950
4,205
620
420
420
1,490
105
590
9,365
3,115
5,650
620
420
420
1,930
235
590
18,630
22,345
SA&S
Benzene
Cyclohexane
Paraxylene
Styrene
Polystyrene
K-Resin ® SBC
Specialty chemicals
Ryton ® PPS
1,600
1,065
1,000
1,050
835
100
605
55
2,470
1,460
1,000
1,875
1,180
170
705
75
Total SA&S
6,310
8,935
Total O&P
* Units shut down at the end of January 2012.
Capacities include CPChem’s share in equity affiliates.
Key Projects
In October 2010, CPChem announced plans to build a 1-hexene plant capable of producing in excess of 200,000 metric tons per year at its
Cedar Bayou Chemical Complex in Baytown, Texas. 1-hexene, a normal alpha olefin, is a critical component used in the manufacture of
polyethylene, a plastic resin commonly converted into film, plastic pipe, milk jugs, detergent bottles and food and beverage containers. Project
planning has begun, with startup anticipated in 2014, subject to project sanctioning.
In November 2011, CPChem completed the acquisition of a polyalphaolefins (PAO) plant located in Beringen, Belgium. The addition of the
plant more than doubled CPChem’s PAO production capability. PAOs are used in many synthetic products, such as lubricants, greases and
fluids, and have emerged as essential components in many industries and applications.
In December 2011, CPChem announced plans to pursue a project to construct a world-scale ethane cracker and two polyethylene facilities in
the U.S. Gulf Coast Region. The project would leverage the development of significant shale gas resources in the United States. CPChem’s
Cedar Bayou facility in Baytown, Texas, would be the location of the 3.3 billion-pounds-per-year ethylene unit. The two polyethylene
facilities, each with an annual capacity of 1.1 billion pounds, would be located at either the Cedar Bayou facility, or near CPChem’s Sweeny
facility in Old Ocean, Texas. Further evaluation will occur during 2012, with a final investment decision expected in 2013.
61
Table of Contents
CPChem owns a 49 percent interest in Qatar Chemical Company Ltd. (Q-Chem), a joint venture that owns a major olefins and polyolefins
complex in Mesaieed, Qatar. CPChem also owns a 49 percent interest in Qatar Chemical Company II Ltd. (Q-Chem II), a second joint venture
in Mesaieed. The Q-Chem II facility produces polyethylene and normal alpha olefins (NAO) on a site adjacent to the Q-Chem complex. In
connection with this project, an ethane cracker that provides ethylene feedstock via pipeline to the Q-Chem II plants was developed in Ras
Laffan Industrial City, Qatar. The ethane cracker and pipeline are owned by Ras Laffan Olefins Company, a joint venture of Q-Chem II and
Qatofin Company Limited. Q-Chem II’s interests in the ethane cracker, pipeline and polyethylene and NAO plants are collectively referred to
as Q-Chem II. Operational startup of Q-Chem II occurred in 2010.
Saudi Chevron Phillips Company (SCP) is a 50-percent-owned joint venture of CPChem that owns and operates an aromatics complex at Jubail
Industrial City, Saudi Arabia. Jubail Chevron Phillips Company (JCP), another 50-percent-owned joint venture of CPChem, owns and operates
an integrated styrene facility adjacent to the SCP aromatics complex. SCP and JCP are collectively known as S-Chem.
In December 2011, Saudi Polymers Company (SPCo), a 35-percent-owned joint venture company of CPChem, completed the construction of
an integrated petrochemicals complex at Jubail Industrial City, Saudi Arabia. SPCo will produce ethylene, propylene, polyethylene,
polypropylene, polystyrene and 1-hexene. Commercial production is expected to commence in 2012.
Other
Our agreement with Chevron regarding CPChem permits Chevron to buy our 50 percent interest in CPChem for fair market value if, at any
time after the separation, we experience a change in control or if both Moody’s Investors Service and Standard & Poor’s Ratings Service lower
our credit ratings below investment grade and the credit rating from either rating agency remains below investment grade for 365 days
thereafter, with fair market value determined by agreement or by nationally recognized investment banks.
TECHNOLOGY DEVELOPMENT
Our Technology group focuses on developing new business opportunities designed to provide future growth prospects for Phillips 66. These
activities are included in “Corporate and Other.” Focus areas include advanced hydrocarbon processes, energy efficiency technologies, new
petroleum-based products, renewable fuels and carbon capture and conversion technologies. We are progressing the technology development of
second-generation biofuels with Iowa State University, the Colorado Center for Biorefining and Biofuels and Archer Daniels Midland. We
have also established a relationship with the University of Texas Energy Institute to collaborate on emerging technologies. Internally, we are
continuing to evaluate wind, solar and geothermal investment opportunities.
We offer a gasification technology (E-Gas™) which converts petroleum coke, coal, and other low-value hydrocarbon feedstocks into
high-value synthesis gas used for a slate of products, including power, substitute natural gas, hydrogen and chemicals. This clean, efficient
technology facilitates carbon capture and storage, minimizes criteria pollutant emissions, and reduces water consumption. E-Gas™ has been
utilized in commercial applications since 1987 and is currently licensed to third parties in Asia and North America, and we are pursuing several
additional licensing opportunities.
COMPETITION
Our R&M segment competes primarily in the United States, Europe and Asia. Based on the statistics published in the December 5, 2011, issue
of the Oil & Gas Journal , we are one of the largest refiners of
62
Table of Contents
petroleum products in the United States. Worldwide, our refining capacity ranked in the top 10 among non-government-controlled companies.
In the Chemicals segment, CPChem generally ranked within the top 10 producers of many of its major product lines, based on average 2011
production capacity, as published by industry sources. Petroleum products, petrochemicals and plastics are delivered into the worldwide
commodity markets. Elements of competition for both our R&M and Chemicals segments include product improvement, new product
development, low-cost structures, and efficient manufacturing and distribution systems. In the marketing portion of the business, competitive
factors include product properties and processibility, reliability of supply, customer service, price and credit terms, advertising and sales
promotion, and development of customer loyalty to branded products.
The Midstream segment, through our equity investment in DCP Midstream and our other operations, competes with numerous integrated
petroleum companies, as well as natural gas transmission and distribution companies, to deliver components of natural gas to end users in the
commodity natural gas markets. DCP Midstream is a large extractor of NGL in the United States. Principal methods of competing include
economically securing the right to purchase raw natural gas into gathering systems, managing the pressure of those systems, operating efficient
NGL processing plants and securing markets for the products produced.
GENERAL
At December 31, 2011, we held a total of 520 active patents in 50 countries worldwide, including 229 active U.S. patents. During 2011, we
received 37 patents in the United States and 35 foreign patents. Our products and processes generated licensing revenues of $10 million in
2011. The overall profitability of any business segment is not dependent on any single patent, trademark, license, franchise or concession.
Company-sponsored research and development activities charged against earnings were $74 million, $56 million and $36 million in 2011, 2010
and 2009, respectively.
In support of our goal to attain zero incidents, we have implemented a comprehensive Health, Safety and Environmental (HSE) management
system to support our business units in achieving consistent management of HSE risks across our enterprise. The management system is
designed to ensure that personal safety, process safety, and environmental impact risks are identified and mitigation steps are taken to reduce
the risk. The management system requires periodic audits to ensure compliance with government regulations as well as our internal
requirements. Our commitment to continuous improvement is reflected in annual goal setting and performance measurement.
Please see the environmental information contained in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Capital Resources and Liquidity—Contingencies” under the captions “Environmental” and “Climate Change.” It includes
information on expensed and capitalized environmental costs for 2011 and those expected for 2012 and 2013.
We had approximately 12,400 employees at December 31, 2011, excluding employees in corporate and other support functions.
LEGAL PROCEEDINGS
The following is a description of reportable legal proceedings, including those involving governmental authorities under federal, state and local
laws regulating the discharge of materials into the environment. While it is not possible to accurately predict the final outcome of these pending
proceedings, if any one or more of such proceedings were decided adversely to Phillips 66, we expect there would be no material effect on our
combined financial position. Nevertheless, such proceedings are reported pursuant to SEC regulations.
63
Table of Contents
Our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the U.S.
Environmental Protection Agency (EPA), six states and one local air pollution agency. Some of the requirements and limitations contained in
the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by
one of the agency signatories. As part of periodic reports under the decrees or other reports required by permits or regulations, we occasionally
report matters that could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the reporting
threshold set forth in SEC rules is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter
and the amount of the proposed penalty.
On November 28, 2011, the Borger Refinery received a Notice of Enforcement from the Texas Commission on Environmental Quality (TCEQ)
for alleged emissions events that occurred during inclement weather in January and February 2011. The TCEQ is seeking a penalty of
$120,000. We are working with TCEQ to resolve this matter.
In October 2011, we were notified by the Attorney General of the State of California that it was conducting an investigation into possible
violations of the regulations relating to the operation of underground storage tanks at gas stations in California. We are contesting these
allegations.
In October 2007, we received a Complaint from the EPA alleging violations of the Clean Water Act related to a 2006 oil spill at the Bayway
Refinery and proposing a penalty of $156,000. We are working with the EPA and the U.S. Coast Guard to resolve this matter.
In 2009, we notified the EPA and the U.S. Department of Justice (DOJ) that we had self-identified certain compliance issues related to Benzene
Waste Operations National Emission Standard for Hazardous Air Pollutants requirements at our Trainer, Pennsylvania, and Borger, Texas,
refineries. In a third amendment to the Consent Decree in Civil Action No. H-05-258, we agreed to pay a $249,000 penalty to resolve the
Trainer Refinery issues and a $98,000 penalty to resolve the Borger Refinery issues. This third amendment has been lodged with the court and
is awaiting judicial approval following a required public notice period.
On May 19, 2010, the Lake Charles Refinery received a Consolidated Compliance Order and Notice of Potential Penalty from the Louisiana
Department of Environmental Quality (LDEQ) alleging various violations of applicable air emission regulations, as well as certain provisions
of the consent decree in Civil Action No. H-01-4430. We are working with the LDEQ to resolve this matter.
In December 2011, we were notified by the EPA of alleged violations related to the use of Renewable Identification Numbers (RINs). The EPA
intends to present an administrative settlement agreement to resolve the alleged violations under which it would seek a penalty of $250,000.
We are working with the EPA to resolve this matter.
In late 2011, we were notified by the EPA that it will be seeking penalties of approximately $150,000 for alleged late emissions reporting at the
Wood River Refinery in 2010 and 2011. We are working with the EPA to resolve this matter.
64
Table of Contents
MANAGEMENT
Executive Officers Following the Distribution
The following table sets forth information, as of April 5, 2012, regarding the individuals who are expected to serve as our executive officers
following the distribution. After the distribution, none of these individuals will continue to be employees of ConocoPhillips. In each case, such
officer selections are expected to become effective on the distribution date.
Name
Greg C. Garland
Position with Phillips 66
Chairman, President and Chief Executive Officer
C. Doug Johnson
Vice President and Controller
52
Paula A. Johnson
Senior Vice President, Legal, General Counsel and Corporate Secretary
48
Greg G. Maxwell
Executive Vice President and Chief Financial Officer
55
Tim G. Taylor
Executive Vice President, Commercial, Transportation, Business Development &
Marketing
58
Executive Vice President, Refining
56
Larry M. Ziemba
Age
54
There are no family relationships among any of the officers named above. Each officer of the company will hold office from the date of
election until the first meeting of the directors held after the initial Annual Meeting of Stockholders or until a successor is elected. Phillips 66
has not yet set the date of the first annual meeting to be held following the distribution. Set forth below is information about the executive
officers identified above.
Greg C. Garland will serve as Chairman of the Board of Directors, President and Chief Executive Officer of Phillips 66. He was appointed
Senior Vice President, Exploration and Production—Americas for ConocoPhillips in October 2010, having previously served as President and
Chief Executive Officer of Chevron Phillips Chemical Company LLC (CPChem) since 2008. Prior to that, he served as Senior Vice President,
Planning and Specialty Products at CPChem from 2000 to 2008. Prior to joining CPChem in 2000, he held several senior positions with
Phillips Petroleum Company (now ConocoPhillips).
C. Doug Johnson will serve as Vice President and Controller. Mr. Johnson has served as General Manager, Upstream Finance, Strategy and
Planning at ConocoPhillips since 2010. Prior to this, he served as General Manager, Downstream Finance from 2008 to 2010 and General
Manager, Upstream Finance from 2005 to 2008.
Paula A. Johnson will serve as Senior Vice President, Legal, General Counsel and Corporate Secretary. Ms. Johnson currently serves as
Deputy General Counsel, Corporate, and Chief Compliance Officer of ConocoPhillips, a position she has held since 2010. Prior to this, she
served as Deputy General Counsel, Corporate from 2009 to 2010 and Managing Counsel, Litigation and Claims from 2006 to 2009.
Greg G. Maxwell will serve as Executive Vice President and Chief Financial Officer of Phillips 66. Mr. Maxwell retired as CPChem’s Senior
Vice President, Chief Financial Officer and Controller in 2012, a position held since 2003. He served as Vice President and Controller of
CPChem from 2000 to 2003. Prior to joining CPChem in 2000, he held several senior positions with Phillips Petroleum Company (now
ConocoPhillips).
Tim G. Taylor will serve as Executive Vice President, Commercial, Transportation, Business Development & Marketing of Phillips 66. Mr.
Taylor retired as Chief Operating Officer of CPChem in 2011. Prior to this,
65
Table of Contents
Mr. Taylor served as Executive Vice President, Olefins & Polyolefins, at CPChem from 2008 to 2011, and Senior Vice President, Olefins &
Polyolefins, from 2000 to 2008. Prior to joining CPChem in 2000, he held several senior positions with Phillips Petroleum Company (now
ConocoPhillips).
Larry M. Ziemba will serve as Executive Vice President, Refining. Mr. Ziemba has served as President, Global Refining, at ConocoPhillips
since 2010. Prior to this, he served as President, U.S. Refining from 2003 to 2010.
DIRECTORS
Composition of the Board of Directors
Under Delaware law, the business and affairs of Phillips 66 will be managed under the direction of its board of directors. The Phillips 66
certificate of incorporation and bylaws provide that the number of directors may be fixed by the board from time to time. We currently expect
that, upon the consummation of our separation, our Board of Directors will consist of seven to ten members, a substantial majority of whom we
expect to satisfy the independence standards established by the Sarbanes-Oxley Act and the applicable rules of the SEC and the NYSE.
Qualification of Directors
We believe the Board of Directors should consist of individuals with appropriate skills and experiences to meet board governance
responsibilities and contribute effectively to our company. Under its charter, the Nominating and Governance Committee will seek to ensure
the Board reflects a range of talents, ages, skills, diversity, and expertise, particularly in the areas of accounting and finance, management,
domestic and international markets, governmental/regulatory, leadership, and petroleum related industries, sufficient to provide sound and
prudent guidance with respect to our operations and interests. The Board will seek to maintain a diverse membership, but will not have a
separate policy on diversity at the time of our separation from ConocoPhillips. The Board will also require that its members be able to dedicate
the time and resources necessary to ensure the diligent performance of their duties on the company’s behalf, including attending Board and
applicable committee meetings.
Board of Directors Following the Distribution
The following table sets forth information, as of April 5, 2012, regarding certain individuals who are expected to serve as members of our
Board of Directors following the distribution. After the distribution, none of these individuals will continue to be directors or employees of
ConocoPhillips. In each case, such appointments are expected to become effective on the distribution date.
Name
Greg C. Garland
Age
54
John E. Lowe
53
Harold W. McGraw III
63
Victoria J. Tschinkel
64
Set forth below is biographical information about the expected directors identified above, as well as a description of the specific skills and
qualifications such candidates are expected to provide to the Phillips 66 Board.
66
Table of Contents
Greg C. Garland will serve as Chairman of the Board of Directors, President and Chief Executive Officer of Phillips 66. He was appointed
Senior Vice President, Exploration and Production—Americas for ConocoPhillips in October 2010, having previously served as President and
Chief Executive Officer of CPChem since 2008. Prior to that, he served as Senior Vice President, Planning and Specialty Products at CPChem
from 2000 to 2008.
Skills and Qualifications : Mr. Garland’s 31-year career with Phillips Petroleum Company, CPChem and ConocoPhillips and, following
the distribution, as CEO of Phillips 66, makes him uniquely and well qualified to serve both as a director and Chairman of the Board. Mr.
Garland’s extensive experience in the industry makes his service as a director invaluable to the company.
John E. Lowe currently serves as Assistant to the CEO of ConocoPhillips, a position he has held since 2008. Prior to his current position, Mr.
Lowe served as Executive Vice President, Exploration & Production, from 2007 to 2008 and Executive Vice President, Commercial from 2006
to 2007.
Skills and Qualifications : Mr. Lowe’s 30-year career with Phillips Petroleum Company and ConocoPhillips makes him well qualified to
serve as a director of Phillips 66. Mr. Lowe also serves as one of ConocoPhillips’ board representatives at DCP Midstream and is a
former board representative of CPChem. His extensive experience within these key joint ventures, as well as within ConocoPhillips and
the broader industry in general, makes him well qualified to serve as a director of Phillips 66.
Harold W. McGraw III currently serves as Chairman, President and Chief Executive Officer of The McGraw-Hill Companies. Prior to his
service as Chairman, he served as President and Chief Executive Officer of The McGraw-Hill Companies from 1998 to 2000 and President and
Chief Operating Officer of The McGraw-Hill Companies from 1993 to 1998. Mr. McGraw currently serves on the boards of The McGraw-Hill
Companies, ConocoPhillips and United Technologies Corporation.
Skills and Qualifications : As an active CEO of a large, global public company with a significant role in the financial reporting industry,
Mr. McGraw’s experience allows him to provide Phillips 66 with valuable financial and operational expertise. In addition, with
experience in operations worldwide, he is well qualified to advise Phillips 66 on its global operations.
Victoria J. Tschinkel currently serves as Chairwoman of 1000 Friends of Florida. Ms. Tschinkel served as Director of the Florida Nature
Conservancy from 2003 to 2006 and was a Senior Environmental Consultant to Landers & Parsons, a Tallahassee, Florida law firm, from 1987
to 2002. Ms. Tschinkel was the Secretary of the Florida Department of Environmental Regulation from 1981 to 1987. Ms. Tschinkel currently
serves on the board of ConocoPhillips.
Skills and Qualifications : Ms. Tschinkel’s extensive environmental regulatory experience makes her well qualified to serve as a member
of the Board. In addition, her relationships and experience working within the environmental community position her to advise the Board
on the impact of our operations in sensitive areas.
Additional Directors
We are in the process of identifying the individuals, in addition to Messrs. Garland, Lowe and McGraw and Ms. Tschinkel, who will be our
directors following the distribution. Upon completion of the separation, we expect seven to ten individuals to serve on the Board.
67
Table of Contents
Committees of the Board of Directors
Our Board of Directors will establish several standing committees in connection with the discharge of its responsibilities. Effective upon the
distribution, our Board of Directors will have the following committees:
Audit and Finance Committee— The principal functions of the Audit and Finance Committee will include:
•
•
•
•
•
Discussing with management, our independent registered public accounting firm, and the internal auditors the integrity of the
company’s accounting policies, internal controls, financial statements, financial reporting practices, and select financial matters,
covering our company’s capital structure, complex financial transactions, financial risk management, retirement plans and tax
planning.
Reviewing significant corporate risk exposures and steps management has taken to monitor, control and report such exposures.
Monitoring the qualifications, independence and performance of our independent registered public accounting firm and internal
auditors.
Monitoring the company’s compliance with legal and regulatory requirements and corporate governance, including our company’s
Code of Business Ethics and Conduct.
Maintaining open and direct lines of communication with the Board of Directors and the company’s management, internal auditors
and independent registered public accounting firm.
The size and composition of the Audit and Finance Committee will meet the independence requirements set forth in the applicable listing
standards of the SEC and the NYSE and requirements set forth in the Audit and Finance Committee charter. At least one member of the Audit
and Finance Committee will qualify as a financial expert within the meaning of applicable SEC rules. The initial membership of the Audit and
Finance Committee will be determined prior to the distribution.
A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Audit and Finance Committee
charter, which will be available on our website: www.Phillips66.com.
Executive Committee— The principal functions of the Executive Committee will include exercising the authority of the full Board of Directors
between board meetings on all matters other than (1) those matters expressly delegated to another committee of the Board, (2) the adoption,
amendment or repeal of any of the company’s By-laws, and (3) matters which cannot be delegated to a committee under statute or our
Certificate of Incorporation or By-laws. The initial members of the Executive Committee will be determined prior to the distribution.
A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Executive Committee charter,
which will be available on our website: www.Phillips66.com.
Human Resources and Compensation Committee— The principal functions of the Human Resources and Compensation Committee will
include:
•
•
•
Overseeing our executive compensation policies, plans, programs and practices.
Assisting the Board of Directors in discharging its responsibilities relating to the fair and competitive compensation of our
company’s executives and other key employees.
Annually reviewing the performance (together with the Nominating and Governance Committee) and setting the compensation of
the Chief Executive Officer (CEO).
68
Table of Contents
The Human Resources and Compensation Committee will consist entirely of independent directors, each of whom will meet the NYSE listing
independence standards and our company’s independence standards. The initial members of the Human Resources and Compensation
Committee will be determined prior to the distribution.
In carrying out its duties, the Human Resources and Compensation Committee will have direct access to outside advisors, independent
compensation consultants and others to assist them.
A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Human Resources and
Compensation Committee charter, which will be available on our website: www.Phillips66.com.
Nominating and Governance Committee— The principal functions of the Nominating and Governance Committee will include:
•
•
•
•
•
•
•
Selecting and recommending director candidates to the Board of Directors to be submitted for election at the annual meeting of
stockholders and to fill any vacancies on the Board.
Recommending committee assignments to the Board of Directors.
Reviewing and recommending to the Board compensation and benefits policies for our non-management directors.
Reviewing and recommending to the Board appropriate corporate governance policies and procedures for the company.
Conducting an annual assessment of the qualifications and performance of the Board.
Reviewing and reporting to the Board annually on the performance of, and succession planning for, the CEO.
Together with the Human Resources and Compensation Committee, annually reviewing the performance of the CEO.
The Nominating and Governance Committee will consist entirely of independent directors, each of whom will meet the NYSE listing
independence standards and our company’s independence standards. The initial members of the Nominating and Governance Committee will
be determined prior to the distribution.
A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Nominating and Governance
Committee charter, which will be available on our website: www.Phillips66.com.
Public Policy— The principal functions of the Public Policy Committee will include:
•
•
Advising the Board of Directors on current and emerging domestic and international public policy issues.
Assisting the Board in the development and review of policies and budgets for charitable and political contributions.
The initial members of the Public Policy Committee will be determined prior to the distribution.
A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Public Policy Committee charter,
which will be available on our website: www.Phillips66.com.
Nominating Process of the Nominating and Governance Committee
One of the principal functions of the Nominating and Governance Committee will be selecting and recommending director candidates to the
Board of Directors to be submitted for election at the annual
69
Table of Contents
meeting of stockholders and to fill any vacancies on the Board. We expect that the Nominating and Governance Committee will identify,
investigate and recommend director candidates to the Board of Directors with the goal of creating balance of knowledge, experience and
diversity. Generally, the Nominating and Governance Committee is expected to identify candidates through business and organizational
contacts of the directors and management. Phillips 66’s By-laws to be in effect at the time of the distribution will permit stockholders to
nominate candidates for director election at a stockholders meeting whether or not such nominee is submitted to and evaluated by the
Nominating and Governance Committee. The Nominating and Governance Committee will consider director candidates recommended by
stockholders. Candidates recommended by the company’s stockholders will be evaluated on the same basis as candidates recommended by the
company’s directors, CEO, other executive officers, third-party search firms or other sources.
Decision-Making Process to Determine Director Compensation
Director compensation will be reviewed annually by the Nominating and Governance Committee, with the assistance of such third party
consultants as the committee deems advisable, and set by action of the Phillips 66 Board of Directors.
Board Risk Oversight
While our company’s management will be responsible for the day-to-day management of risks to the company, the Board of Directors will
have broad oversight responsibility for our risk management programs following the separation from ConocoPhillips. In this oversight role, the
Board will be responsible for satisfying itself that the risk management processes designed and implemented by management are functioning as
intended, and necessary steps are taken to foster a culture of risk-adjusted decision-making throughout the organization. In carrying out its
oversight responsibility, the Board is expected to delegate to individual Board committees certain elements of its oversight function. In this
context, the Board is expected to delegate authority to the Audit and Finance Committee to facilitate coordination among the Board’s
committees with respect to oversight of our risk management programs. As part of this authority, the Audit and Finance Committee regularly
will discuss the company’s risk assessment and risk management policies to ensure our risk management programs are functioning properly.
Additionally, the Chairman of the Audit and Finance Committee will meet with the Chairs of the other Board committees each year to discuss
the Board’s oversight of the company’s risk management programs. The Board will receive regular updates from its committees on individual
areas of risk, such as updates on financial risks from the Audit and Finance Committee, health, safety and environmental risks from the Public
Policy Committee and compensation program risks from the Human Resources and Compensation Committee.
Communications with the Board of Directors
Upon our separation from ConocoPhillips, our Board of Directors will maintain a process for stockholders and interested parties to
communicate with the Board. Stockholders and interested parties may write or call our Board of Directors by contacting our Corporate
Secretary as provided below:
•
•
Mailing Address : Corporate Secretary Phillips 66, 600 N. Dairy Ashford, Houston, TX 77079
Phone Number : 281-293-6600
Relevant communications will be distributed to the Board of Directors or to any individual director or directors, as appropriate, depending on
the facts and circumstances outlined in the communication. In that regard, certain items unrelated to the Board’s duties and responsibilities will
be excluded, such as: business solicitations or advertisements; junk mail and mass mailings; new product suggestions; product complaints;
product inquiries; resumes and other forms of job inquiries; spam; and surveys. In addition, material that is unduly hostile, threatening, illegal
or similarly unsuitable will be excluded. Any communication that is filtered out will be made available to any outside director upon request.
70
Table of Contents
COMPENSATION DISCUSSION AND ANALYSIS
For purposes of the following Compensation Discussion and Analysis (CD&A) and Executive Compensation disclosures, the individuals who
served as our principal executive officer and chief financial officer in 2011 and the next three most highly compensated individuals who served
in other senior executive positions with us in 2011 are collectively referred to as our “Named Executive Officers.” While this group of
executive officers reflects our senior executive team for 2011, most of these executives will not be our executives following the separation (see
“Management—Executive Officers Following the Distribution”).
The compensation decisions described in CD&A with respect to 2011 were made by the Human Resources and Compensation Committee of
ConocoPhillips (HRCC or Committee), which is composed entirely of independent directors. Executive compensation decisions following the
separation will be made by the Human Resources and Compensation Committee of Phillips 66 (our “Compensation Committee”), which also
will be composed entirely of independent directors.
This Compensation Discussion and Analysis has three main parts:
•
•
•
ConocoPhillips 2011 Executive Compensation —This section describes and analyzes the executive compensation programs at
ConocoPhillips in 2011 (beginning on page 71).
Effects of the Separation on Outstanding Executive Compensation Awards —This section discusses the effect of the separation on
outstanding compensation awards for our Named Executive Officers (beginning on page 84).
Phillips 66 Compensation Programs —This section discusses the anticipated executive compensation programs at Phillips 66
(beginning on page 85).
ConocoPhillips 2011 Executive Compensation
Executive Summary
Program Goals —ConocoPhillips’ compensation program goals are to attract, retain and motivate high-quality employees and to maintain
high standards of principled leadership so that ConocoPhillips can responsibly deliver energy to the world and provide sustainable value for its
stakeholders, now and in the future. ConocoPhillips believes that its ability to responsibly deliver energy and to provide sustainable value is
driven by superior individual performance. Moreover, ConocoPhillips believes employees in leadership roles within the organization are
motivated to perform at their highest levels by making performance-based pay a significant portion of their compensation.
Program Structure —ConocoPhillips’ executive compensation program has four primary components: Base Salary; the Variable Cash
Incentive Program (VCIP); the Stock Option Program; and the Performance Share Program (PSP). Awards under the performance-based
programs (VCIP, Stock Option Program and PSP) are based on ConocoPhillips’ performance measured against the criteria it believes are most
likely to drive successful long-term performance. Since its compensation programs are not formulaic, the HRCC evaluates these measurements
subjectively and also considers overall ConocoPhillips and individual performance in making its decisions.
Analysis of 2011 Executive Compensation
The following is a discussion and analysis of the decisions of the HRCC in compensating Named Executive Officers for 2011.
71
Table of Contents
In determining performance-based compensation awards for our Named Executive Officers as senior officers of ConocoPhillips for
performance periods concluding in 2011, the HRCC began by considering overall company performance, including the following
accomplishments and operating conditions:
•
•
•
•
•
•
•
The development and implementation of a strategic plan to enhance ConocoPhillips’ operating and financial position.
120 percent organic reserve replacement, excluding the impact of acquisitions and dispositions.
Achievement of barrel of oil equivalent (BOE) production and capacity utilization targets.
Significant progress in high grading ConocoPhillips’ asset portfolio while strengthening liquidity.
Successful exploration efforts.
Maintained HSE results at record 2010 levels.
Advancement of ConocoPhillips’ succession plans.
The HRCC then considered any adjustments to the awards under ConocoPhillips’ three performance-based compensation programs (VCIP,
Stock Option Program and PSP) in accordance with their terms and pre-established criteria, while retaining the discretion to adjust awards
based solely on the HRCC’s determination of appropriate payouts.
As a result, the HRCC made the following award decisions under ConocoPhillips’ performance-based compensation programs.
2011 VCIP Awards
In determining award payouts under VCIP for 2011, the HRCC considered the following performance criteria:
•
Company Performance for 2011 —In 2011, our VCIP program used both quantitative and qualitative performance measures relating
to ConocoPhillips as a whole, including:






Ranking 4th in relative annual total stockholder return compared with the performance-measurement peer group
(ExxonMobil, Royal Dutch Shell, BP, Total, and Chevron).
Ranking 1st in percentage change and 2nd in absolute change in improvement in relative annual adjusted return on capital
employed compared with the same peer group noted above.
Ranking 1st in percentage and absolute change in relative annual adjusted cash return on capital employed compared with
the same peer group noted above.
Ranking 2nd in relative adjusted cash contribution per BOE compared with the same peer group noted above.
ConocoPhillips’ health, safety and environmental performance.
Advancement and support of ConocoPhillips’ key strategic initiatives and plans.
Based on such review, management recommended, and the HRCC concluded, that ConocoPhillips’ performance under these
measures in 2011 merited award of 150 percent of the targeted amount. This compared with VCIP corporate award performance
of 180 percent in 2010; 111 percent in 2009; 70 percent in 2008; 140 percent in 2007; and 142 percent in 2006.
•
Business Unit Performance in 2011 —In determining award unit performance, management’s determinations of performance by
ConocoPhillips’ award units under their performance criteria were reviewed and approved by the HRCC. Each executive’s award
was tied to the operational or staff award unit over which they had responsibility weighted to reflect their time of service within such
unit. The HRCC determined that the combined corporate and award unit performance merited base awards of between 136 percent
and 153 percent of target for each of our Named Executive Officers, other than Mr. Mulva. As noted under “Business Unit
Performance Criteria,” Mr.Mulva’s award, as CEO of
72
Table of Contents
ConocoPhillips (and our principal executive officer), is based on individual and overall company performance.
•
Individual Performance Adjustments —Finally, the HRCC considered individual adjustments for each Named Executive Officer’s
2011 VCIP award based upon a subjective review of the individual’s impact on ConocoPhillips’ financial and operational success
during the year. The HRCC considered the totality of the executive’s performance in deciding the individual adjustments. Based on
the foregoing, the HRCC approved individual performance adjustments of between zero percent and 25 percent for each of the
Named Executive Officers. The individual adjustments for these officers reflect the HRCC’s recognition of these individuals’
contributions to the strong 2011 operational performance of their respective operating units.
Stock Option Awards
Although the HRCC retains discretion to adjust stock option awards by up to 30 percent from the specified target, the HRCC did not elect to
exercise such discretion with respect to the Stock Option Awards granted in February 2011.
PSP Awards (2009–2011 Performance Period)
In December 2008, the HRCC established the seventh performance period under the PSP, for the three-year period beginning January 1, 2009,
and ending December 31, 2011 (PSP VII). In February 2012, in determining awards under the PSP for this period, the HRCC considered
quantitative and qualitative performance measures relating to ConocoPhillips as a whole, including:
•
•
•
•
•
•
•
•
•
•
•
•
Ranking 3rd in relative total stockholder return compared with the performance-measurement peer group (ExxonMobil, Chevron,
Royal Dutch Shell, BP, and Total), with only a 0.3 percent return separating the top three performers in this group.
Ranking 5th in relative annual adjusted return on capital employed compared with the same peer group noted above.
Ranking 2nd in percentage change and absolute change in improvement in relative annual adjusted return on capital employed
compared with the same peer group noted above.
Ranking 2nd in relative adjusted cash contribution per BOE compared with the same peer group noted above.
ConocoPhillips’ health, safety and environmental performance.
Implementation of ConocoPhillips’ strategic plans.
Financial management.
Climate change initiatives.
Enhancement of reputation.
Culture and diversity initiatives.
Opportunity capture.
Leadership development and succession planning.
Based on this review, the HRCC determined that ConocoPhillips’ performance under the stated criteria during the three-year performance
period merited award of 165 percent of the targeted amount. This compared with three-year performance meriting awards compared with the
target amount under the PSP of 140 percent for the 2008–2010 period, 60 percent for the 2007–2009 period, 110 percent for the 2006–2008
period, 175 percent for the 2005–2007 period and 180 percent for the 2004–2006 period. With respect to individual adjustments, similar to the
2011 VCIP program, the HRCC considered PSP individual adjustments for each Named Executive Officer in recognition of the individual’s
personal leadership and contribution to the Company’s financial and operational success over the three-year performance period. Based on the
foregoing, the HRCC approved individual performance adjustments of between 10 percent and 25 percent for our Named Executive Officers.
73
Table of Contents
The Objectives and Process of Compensating Executives
Program Goals —ConocoPhillips’ goals are to attract, retain and motivate high-quality employees and to maintain high standards of principled
leadership, so ConocoPhillips can responsibly deliver energy to the world and provide sustainable value for ConocoPhillips’ stakeholders, now
and in the future.
Program Philosophy —ConocoPhillips believes its ability to responsibly deliver energy and to provide sustainable value is driven by superior
individual performance. ConocoPhillips also believes that a company must offer competitive compensation to attract and retain experienced,
talented and motivated employees. Moreover, ConocoPhillips believes employees in leadership roles within the organization are motivated to
perform at their highest levels by making performance-based pay a significant portion of their compensation.
Program Principles —To achieve its goals, ConocoPhillips implements its philosophy through the following guiding principles:
•
•
•
•
•
•
Establish target compensation levels that are competitive with those of other companies with whom it competes for executive talent.
Create a strong link between executive pay and ConocoPhillips’ performance.
Encourage prudent risk taking by ConocoPhillips executives.
Motivate performance by considering specific individual accomplishments in determining compensation.
Retain talented individuals with ConocoPhillips until retirement.
Integrate all elements of compensation into a comprehensive package that aligns goals, efforts, and results throughout the
organization.
The Human Resources and Compensation Committee
The HRCC is responsible for all compensation actions related to ConocoPhillips’ senior officers, including, prior to the separation, all of our
Named Executive Officers. Although the HRCC’s charter permits it to delegate authority to subcommittees or other Board Committees, the
Committee made no such delegations in 2011.
Compensation Program Design
ConocoPhillips’ executive compensation programs take into account marketplace compensation for executive talent, internal pay equity with
its employees, past practices of ConocoPhillips, corporate, business unit and individual results and the talents, skills and experience that each
individual executive brings to ConocoPhillips. Our Named Executive Officers each serve without an employment agreement. All compensation
for these officers is set by the Committee as described below.
The HRCC begins by establishing target levels of total compensation for ConocoPhillips’ senior officers for a given year. Once an overall
target compensation level is established, the Committee considers the weighting of each of ConocoPhillips’ primary compensatory programs
(Base Salary, VCIP, Stock Option Program and PSP) within the intended total target compensation.
Salary Grade Structure
Management, with the assistance of outside compensation consultants, thoroughly examines the scope and complexity of jobs throughout
ConocoPhillips and studies the competitive compensation practices for such jobs. As a result of this work, management develops a
compensation scale under which all positions are
74
Table of Contents
designated with specific “grades.” For ConocoPhillips’ executives, the base salary midpoint increases at each increasing grade, but at a lesser
rate than increases in target incentive compensation percentages. The result is an increased percentage of “at risk” compensation as the
executive’s grade is increased. Any changes in compensation for ConocoPhillips’ senior officers resulting from a change in salary grade are
approved by the HRCC.
Benchmarking
With the assistance of ConocoPhillips’ outside compensation consultants, ConocoPhillips sets target compensation by referring to multiple
relevant compensation surveys that include but are not limited to large energy companies. ConocoPhillips then compares that information to
ConocoPhillips’ salary grade targets (both for base salary and for incentive compensation) and makes any changes needed to bring the
cumulative target for each salary grade to broadly the 50th percentile for similar positions as indicated by the survey data.
For our Named Executive Officers, ConocoPhillips conducts benchmarking, using available data, for each individual position. For example,
although ConocoPhillips determines targets by benchmarking against other large, publicly held energy companies, ConocoPhillips often uses
broader measures, such as mid-sized publicly held energy companies and other large, publicly held companies outside the energy industry, in
setting targets for ConocoPhillips’ executives. Cogent Compensation Partners, the HRCC’s independent executive compensation consultant,
then reviews and independently advises on the conclusions reached as a result of this benchmarking, and the Committee uses the results of
these surveys as a factor in setting compensation structure and targets relating to our Named Executive Officers as senior officers of
ConocoPhillips.
The HRCC’s use of primary peer groups in the context of ConocoPhillips’ compensation programs generally falls into two broad categories:
setting compensation targets and measuring company performance.
Setting Compensation Targets
In setting total compensation targets and targets within each individual program the HRCC used the following primary peer group for
benchmarking purposes—Exxon Mobil, Royal Dutch Shell, BP, and Chevron, with emphasis on the Company’s domestic peers, particularly in
setting CEO target compensation.
The HRCC also utilized a secondary group of peer companies for benchmarking the compensation of ConocoPhillips Named Executive
Officers—Valero, Marathon Oil, Occidental, and, for the CEO and staff executives, other large, publicly held, non-financial companies in the
Fortune 50, including those outside the energy industry.
ConocoPhillips utilizes these peer groups in setting compensation targets because these companies are broadly reflective of the industry in
which it competes for business opportunities and for executive talent, and because these peers provide a good indicator of the current range of
executive compensation.
Measuring Performance
ConocoPhillips believes its performance is best measured against the companies with which ConocoPhillips competes in its business
operations. Therefore, in 2011, the HRCC assessed ConocoPhillips’ actual performance for a given period by using ExxonMobil, Royal Dutch
Shell, BP, Total, and Chevron as its primary benchmarking peer group.
Developing Performance Measures
ConocoPhillips has attempted to develop performance metrics that assess its performance relative to its primary peer group rather than
assessing absolute performance. This is based on the belief that absolute performance can be affected positively or negatively by industry-wide
factors over which ConocoPhillips’
75
Table of Contents
executives have no control, such as prices for crude oil and natural gas. ConocoPhillips has selected multiple metrics, as described below,
because it believes no one metric is sufficient to capture the performance it is seeking to drive, and any metric in isolation is unlikely to
promote the well-rounded executive performance necessary to enable it to achieve long-term success. The HRCC reassesses performance
metrics periodically.
Internal Pay Equity
ConocoPhillips believes its compensation structure provides a framework for an equitable compensation ratio between executives, with higher
targets for jobs at salary grades having greater duties and responsibilities. Taken as a whole, ConocoPhillips’ compensation program is
designed so that the individual target level rises as salary grade level increases, with the portion of performance-based compensation rising as a
percentage of total targeted compensation. One result of this structure is that an executive’s actual total compensation as a multiple of the total
compensation of his or her subordinates is designed to increase in periods of above-target performance and decrease in times of below-target
performance. In addition, the HRCC also reviews the compensation of senior officers periodically to ensure officers with similar levels of
responsibilities are compensated equitably.
Alignment of Interests—Stock Holding Requirements
ConocoPhillips places a premium on aligning the interests of executives with those of ConocoPhillips’ stockholders. ConocoPhillips Stock
Ownership Guidelines require executives to own stock and/or have an interest in restricted stock units valued at a multiple of base salary,
ranging from 1.8 times salary for lower-level executives, to 6 times salary for the CEO of ConocoPhillips. Employees have five years from the
date they become subject to these Guidelines to comply. The multiple of equity held by each of the Named Executive Officers exceeds
ConocoPhillips established guidelines for his or her position. ConocoPhillips’ policies prohibit executives from trading in derivatives of
ConocoPhillips stock.
In addition, ConocoPhillips has historically required its executives to hold restricted stock units received under the PSP, and under predecessor
programs, until death, disability, retirement, layoff, or severance after a change in control. The units were generally forfeited if an executive
voluntarily left ConocoPhillips’ employ when not retirement eligible. ConocoPhillips was informed by the HRCC’s compensation consultants
that this was a highly unusual feature. In light of this fact, the HRCC considered ConocoPhillips’ programs and determined, for performance
periods beginning in 2009, restrictions on restricted stock unit awards will lapse five years from the anniversary of the issuance of the units,
although senior officers may elect to defer the lapsing of such restrictions. The HRCC believes this change ensures ConocoPhillips’ executives
maintain their focus on long-term performance, while also allowing ConocoPhillips’ programs to be more competitive with those of its peers.
Risk Assessment
ConocoPhillips has considered the risks associated with each of its executive and broad-based compensation programs and policies. As part of
the analysis, it considered the performance measures used and described under “Measuring Performance under ConocoPhillips’ Compensation
Programs” below, as well as the different types of compensation, the varied performance measurement periods and the extended vesting
schedules utilized under each incentive compensation program for both executives and other employees. As a result of this review,
ConocoPhillips has concluded the risks arising from its compensation policies and practices for its employees are not reasonably likely to have
a material adverse effect on ConocoPhillips. As part of the ConocoPhillips Board’s oversight of risk management programs, the HRCC
conducts an annual review of the risks associated with ConocoPhillips’ executive and broad-based compensation programs. The HRCC’s
independent consultant and ConocoPhillips’ compensation consultant noted their agreement with management’s conclusion that the risks
arising from the company’s compensation policies and practices for its employees are not reasonably likely to have a material adverse effect on
ConocoPhillips.
76
Table of Contents
Statutory and Regulatory Considerations
In designing ConocoPhillips’ compensatory programs, ConocoPhillips considers and takes into account the various tax, accounting and
disclosure rules associated with various forms of compensation. The HRCC also reviews and considers the deductibility of executive
compensation under Section 162(m) of the Code and designs its compensation programs with the intent that they comply with Section 409A of
the Code. The HRCC seeks to preserve tax deductions for executive compensation. However, the HRCC has awarded compensation that might
not be fully tax deductible when it believes such grants are nonetheless in the best interests of ConocoPhillips’ stockholders.
Option Pricing
When the Committee grants stock options to its Named Executive Officers, ConocoPhillips uses an average of the high and low prices of its
common stock on the date of grant (or the preceding business day, if the markets are closed on the date of grant) to determine the exercise price
of the stock options. Stock option grants are generally made at the HRCC’s February meeting (the date of which is determined at least a year in
advance) or, in the case of new hires, on the date of commencement of employment or the date of HRCC approval, whichever is later.
Independent Consultants
In 2010, the HRCC retained Cogent Compensation Partners to serve as its independent executive compensation consultant. The HRCC has
adopted specific guidelines for outside compensation consultants, which (1) require that work done by such consultants for ConocoPhillips at
management’s request be approved in advance by the HRCC; (2) require a review of the advisability of replacing the independent consultant
after a period of five years; and (3) prohibit ConocoPhillips from employing any individual who worked on its account for a period of one year
after leaving the employment of the independent consultant. In 2011, Cogent provided an annual attestation of its compliance with these
guidelines.
The Committee strongly discourages management proposals to retain the HRCC’s independent consultant for any work other than advising the
HRCC and does not approve any work proposed by ConocoPhillips that it believes would compromise the consultant’s independence. No work
proposals for Cogent were submitted by management in 2011 and no fees were paid to Cogent by ConocoPhillips other than for their services
as an independent consultant to the HRCC.
The Types of Compensation Provided to Executives
Base Salary
Base salary is a major component of the compensation for all of ConocoPhillips’ salaried employees; although it becomes a smaller component
as an employee rises through the salary grade structure. Base salary is important to give an individual financial stability for personal planning
purposes. There are also motivational and reward aspects to base salary, as base salary can be increased or decreased to account for
considerations such as individual performance and time in position.
Performance-Based Pay Programs
Annual Incentive —The VCIP is an annual incentive program that is broadly available to ConocoPhillips’ employees throughout the world, and
it is the primary vehicle for recognizing company, business unit, and individual performance for the past year. ConocoPhillips believes that
having an annual “at risk” compensation element for all employees, including executives, gives them a financial stake in the achievement of
ConocoPhillips’ business objectives and, therefore, motivates them to use their best efforts to ensure the achievement of those objectives.
ConocoPhillips believes that measuring and rewarding performance on an annual basis in a compensation program is appropriate because, like
ConocoPhillips’
77
Table of Contents
primary peers and other public companies, ConocoPhillips measures and reports its business accomplishments annually. Additionally,
ConocoPhillips’ valuation is derived, in part, from comparisons of these annual results with those of ConocoPhillips’ primary peers and relative
to prior annual periods. ConocoPhillips also believes that one year is a time period over which all employees who participate in the program
can have the opportunity to establish and achieve their specified goals. The base award is weighted equally for corporate and business unit
performance for the Named Executive Officers other than the CEO of ConocoPhillips, and solely on corporate performance for the CEO of
ConocoPhillips. The HRCC has discretion to adjust the base award up or down based on individual performance and makes its decision on
individual performance adjustments based on the input of the CEO of ConocoPhillips for all of our Named Executive Officers (other than for
himself).
Long-Term Incentives —ConocoPhillips’ primary long-term incentive compensation programs for executives are the Stock Option Program
and the PSP.
ConocoPhillips’ program targets generally provide approximately 50 percent of the long-term incentive award in the form of stock options and
50 percent in the form of restricted stock units awarded under the PSP.
•
Stock Option Program —The Stock Option Program is designed to maximize medium- and long-term stockholder value. The
practice under this program is to set stock option exercise prices at not less than 100 percent of ConocoPhillips stock’s fair market
value at the time of the grant. Because the stock option’s value is derived solely from an increase in the ConocoPhillips stock price,
the value of a stockholder’s investment in ConocoPhillips must appreciate before a stock option holder receives any financial benefit
from the stock option. ConocoPhillips’ stock options have three-year vesting provisions and ten-year terms in order to incentivize its
executives to increase ConocoPhillips’ share price over the long term.
•
Performance Share Program —The PSP rewards executives based on their individual performances and the performance of
ConocoPhillips over a three-year period. Each year the HRCC establishes a three-year performance period over which it compares
the performance of ConocoPhillips with that of its performance-measurement peer group using pre-established criteria. Thus, in any
given year, there are three overlapping performance periods. Use of a multi-year performance period helps to focus management on
longer-term results.
Each executive’s individual award under the PSP is subject to a potential positive or negative performance adjustment at the end of
the performance period. Although the HRCC maintains final discretion to adjust compensation in accordance with any extraordinary
circumstances that may arise, and has done so in the past, program guidelines generally result in an award range between
0 to 200 percent of target. Final awards are based on the HRCC’s subjective evaluation of ConocoPhillips’ performance relative to
the established metrics (discussed below under the heading “Measuring Performance under ConocoPhillips’ Compensation
Programs”) and of each executive’s individual performance. The HRCC considers input from the CEO of ConocoPhillips with
respect to senior officers, including all of our Named Executive Officers except for our principal executive officer, who is also the
CEO of ConocoPhillips. Targets for participants whose salary grades are changed during a performance period are prorated for the
period of time such participant remained in each relevant salary grade.
The combination of the Stock Option Program, the PSP, and the PSP’s extended restricted stock unit holding periods provides a
comprehensive package of medium and long-term compensation incentives for ConocoPhillips’ executives that align their interests
with those of its long-term
78
Table of Contents
stockholders. Such extended holding periods also enable ConocoPhillips to more readily withdraw awards should circumstances arise
that merit such action. To date, none of our Named Executive Officers have been subject to reductions or withdrawals of prior grants
or payouts of restricted stock, restricted stock units or stock option awards.
•
Other Possible Awards —ConocoPhillips may make awards outside the Stock Option Program or the PSP (off-cycle awards).
Off-cycle awards (also commonly referred to as “ad hoc” or “special purpose” awards) are awards granted outside the context of
ConocoPhillips’ regular compensation programs. Currently, off-cycle awards are granted to certain incoming executive personnel,
typically on the first day of employment, for one or more of the following reasons: (1) to induce an executive to join ConocoPhillips
(occasionally replacing compensation the executive will lose because of termination from the prior employer); (2) to induce an
executive of an acquired company to remain with ConocoPhillips for a certain period of time following the acquisition; or (3) to
provide a pro-rata equity award to an executive who joins ConocoPhillips during an ongoing performance period for which he or she
is ineligible under the standard PSP or Stock Option Program provisions. In these cases, the HRCC has sometimes approved a
shorter period for restrictions on transfers of restricted stock units than those issued under the PSP or Stock Option Program.
Pursuant to the Committee’s charter, any off-cycle awards to senior officers must be approved by the HRCC. No such awards were
made to our Named Executive Officers in 2011.
Broadly Available Plans
Our Named Executive Officers participate in the same basic benefits package as ConocoPhillips’ other U.S. salaried employees. This includes
retirement, medical, dental, vision, life insurance, expatriate benefits and accident insurance plans, as well as flexible spending arrangements
for health care and dependent care expenses.
Other Compensation and Personal Benefits
In addition to ConocoPhillips’ four primary compensation programs, it provided our Named Executive Officers a limited number of additional
benefits. In order to provide a competitive package of compensation and benefits, ConocoPhillips provides our Named Executive Officers with
executive life insurance coverage and defined benefit plans. ConocoPhillips also provides other benefits that are designed primarily to
minimize the amount of time our Named Executive Officers devote to administrative matters other than ConocoPhillips business, to promote a
healthy work/life balance, to provide opportunities for developing business relationships, and to put a human face on its social responsibility
programs. All such programs are approved by the HRCC.
Comprehensive Security Program —Because ConocoPhillips’ executives face personal safety risks in their roles as representatives of a global,
integrated energy company, ConocoPhillips’ Board of Directors has adopted a comprehensive security program for its executives.
Personal Entertainment —ConocoPhillips purchases tickets to various cultural, charitable, civic, entertainment and sporting events for business
development and relationship-building purposes, as well as to maintain ConocoPhillips’ involvement in communities in which it operates.
Occasionally, ConocoPhillips’ employees, including ConocoPhillips’ executives, make personal use of tickets that would not otherwise be used
for business purposes. ConocoPhillips believes these tickets offer an opportunity to increase morale at a very low or no incremental cost.
Tax Gross-Ups —Certain of the personal benefits received by ConocoPhillips’ executives are deemed to be taxable income to the individual by
the Internal Revenue Service. When ConocoPhillips believes that such
79
Table of Contents
income is incurred for purposes more properly characterized as ConocoPhillips business than personal benefit, ConocoPhillips provides further
payments to the executive to reimburse the cost of the inclusion of such items in the executive’s taxable income. Most often, these tax gross-up
payments are provided for travel by a family member or other personal guest to attend a meeting or function in furtherance of ConocoPhillips
business, such as Board meetings, ConocoPhillips-sponsored events, and industry and association meetings where spouses or other guests are
invited or expected to attend.
Executive Life Insurance —ConocoPhillips maintains life insurance policies and/or death benefits for all of its U.S.-based salaried employees
(at no cost to the employee) with a face value approximately equal to the employee’s annual salary. For each of our Named Executive Officers,
ConocoPhillips maintains an additional life insurance policy and/or death benefits (at no cost to the executive) with a value equal to her or his
annual salary. In addition to these two plans, ConocoPhillips also provides its executives the option of purchasing group variable universal life
insurance in an amount up to eight times their annual salaries. ConocoPhillips believes this is a benefit valued by ConocoPhillips’ executives
that can be provided at no cost to ConocoPhillips.
Defined Contribution Plans —ConocoPhillips maintains the following nonqualified defined contribution plans for its executives. These plans
allow deferred amounts to grow tax-free until distributed.
•
Voluntary Deferred Compensation Plans —The purpose of ConocoPhillips’ voluntary nonqualified deferred compensation plans is
to allow executives to defer a portion of their salary and annual incentive compensation so that such amounts are taxable in the year
in which distributions are made.
•
Make-Up Plans —The purpose of ConocoPhillips’ nonqualified defined contribution make-up plans is to provide benefits that an
executive would otherwise lose due to limitations imposed by the Internal Revenue Code on qualified plans.
Defined Benefit Plans —ConocoPhillips also maintains nonqualified defined benefit plans for ConocoPhillips’ executives. The primary
purpose of these plans is to provide benefits that an executive would otherwise lose due to limitations imposed by the Internal Revenue Code
on qualified plans. With regard to the ConocoPhillips senior officers, including our Named Executive Officers, the only such arrangement
under which they are entitled to benefits of this type is the Key Employee Supplemental Retirement Plan (KESRP). This plan is designed to
replace benefits that would otherwise not be received due to limitations contained in the Internal Revenue Code that apply to qualified plans.
The two such limitations that most frequently impact the benefits to employees are the limit on compensation that can be taken into account in
determining benefit accruals and the maximum annual pension benefit. In 2011, the former limit was set at $245,000, while the latter was set at
$195,000. The KESRP determines a benefit without regard to such limits, and then reduces that benefit by the amount of benefit payable from
the related qualified plan, the ConocoPhillips Retirement Plan. Thus, in operation the combined benefits payable from the related plans for the
eligible employee equal the benefit that would have been paid if there had been no limitations imposed by the Internal Revenue Code. This
design is common among ConocoPhillips’ competitors, and ConocoPhillips believes that lack of such a plan would put it at a great
disadvantage in attracting and retaining talented executives.
Severance Plans and Changes in Control
ConocoPhillips maintains plans to address severance of its executives in certain circumstances as described under “Executive Severance and
Changes in Control.” The structure and use of these plans are competitive within the industry and are intended to aid ConocoPhillips in
attracting and retaining executives.
80
Table of Contents
Measuring Performance under ConocoPhillips’ Compensation Programs
ConocoPhillips uses corporate and business unit performance criteria in determining individual payouts. In addition, ConocoPhillips’ programs
contemplate that the Committee will exercise discretion in assessing and rewarding individual performance.
Corporate Performance Criteria
ConocoPhillips utilizes multiple measures of performance under its programs to ensure no single aspect of performance is driven in isolation.
ConocoPhillips has employed the following measures of overall company performance under its performance-based programs:
Relative Total Stockholder Return —Total stockholder return represents the percentage change in a company’s common stock price from the
beginning of a period of time to the end of the stated period, and assumes common stock dividends paid during the stated period are reinvested
into that common stock. ConocoPhillips uses a total stockholder return measure because it is the most tangible measure of the value
ConocoPhillips has provided to its stockholders during the relevant program period. ConocoPhillips recognizes that total stockholder return is
not a perfect measure. It can be affected by factors beyond management’s control and by market conditions not related to the intrinsic
performance of ConocoPhillips. Stockholder return over the short-term can also fail to fully reflect the value of longer-term projects.
ConocoPhillips seeks to mitigate the influence of industry-wide or market-wide conditions on stock price by using total stockholder return
relative to its primary peer group.
Relative Adjusted Return on Capital Employed —ConocoPhillips’ businesses are capital intensive, requiring large investments, in most cases
over a number of years, before tangible financial returns are achieved. Therefore, ConocoPhillips believes a good indicator of long-term
company and management performance, both absolute and relative to ConocoPhillips’ primary peer group, is the measure known as return on
capital employed (ROCE). Relative ROCE is a measure of the profitability of ConocoPhillips’ capital employed in its business compared with
that of its peers. ConocoPhillips calculates ROCE as a ratio, the numerator of which is net income plus after-tax interest expense, and the
denominator of which is average total equity plus total debt. ConocoPhillips also adjusts the net income of ConocoPhillips and its peers for
certain non-core earnings impacts. ConocoPhillips’ compensation programs consider ConocoPhillips’ improvement on Adjusted ROCE relative
to its performance-measurement peer group.
Relative Adjusted Income per barrel of oil equivalent (BOE) —An important measure of operating efficiency and management performance is
a comparison of the income earned by ConocoPhillips per BOE produced by its Exploration and Production (E&P) business segment, and per
barrel of petroleum products sold by its Refining and Marketing (R&M) business segment, versus those of its peers. This measure allows
ConocoPhillips to compare its operating efficiency in producing and refining/marketing products against that of its performance-measurement
peer group. The measure is calculated by dividing adjusted income attributable to ConocoPhillips’ E&P and R&M segments by the number of
BOE produced or barrels of petroleum products sold, respectively. A weighted average of these two segment-level metrics is then calculated
and compared against that of ConocoPhillips’ peers. As with its calculation of Adjusted ROCE, ConocoPhillips adjusts both its own income
and that of its peers to reflect certain non-core earnings impacts.
Relative Adjusted Cash Contribution per BOE —Another important measure of operating efficiency and management performance is
ConocoPhillips’ cash contributions per BOE produced by ConocoPhillips’ E&P segment, and per barrel of petroleum products sold by
ConocoPhillips’ R&M segment. This measure is another way to compare ConocoPhillips’ operating efficiency in producing and
refining/marketing
81
Table of Contents
products against that of its performance-measurement peer group. The measure is calculated by dividing the adjusted income from operations
plus the depreciation, depletion and amortization attributable to ConocoPhillips’ E&P or R&M segments by the number of BOE produced or
barrels of petroleum products sold, respectively. A weighted average of these two segment-level metrics is then calculated, and compared
against that of ConocoPhillips’ peers. As with its calculation of Adjusted ROCE, ConocoPhillips adjusts both its own income and that of its
peers to reflect certain non-core earnings impacts.
Relative Improvement in Adjusted Cash Return on Capital Employed —Similar to ROCE, adjusted cash return on capital employed (CROCE)
measures a company’s performance in efficiently allocating its capital. While ROCE is based on adjusted net income, CROCE is based on cash
flow, measuring the ability of a company’s capital employed to generate cash. CROCE is calculated by dividing adjusted EBIDA (earnings
before interest, depreciation and amortization, adjusted for non-core earnings impacts) by average capital employed (total equity plus total
debt). ConocoPhillips’ improvement in CROCE is compared against that of its peers.
Health, Safety and Environmental Performance —ConocoPhillips seeks to be a good employer, a good community member and a good steward
of the environmental resources it manages. Therefore, ConocoPhillips incorporates metrics of health, safety and environmental performance in
its annual incentive compensation program.
Implementation and Advancement of Strategic Plan —This measure is a subjective analysis of ConocoPhillips’ progress in implementing its
strategic plan over a given performance period.
Succession Planning/Leadership Development —This measure is a subjective analysis of ConocoPhillips’ progress in developing and
implementing a comprehensive succession plan for senior management, and the development and implementation of a company-wide program
for identifying and developing future leaders within ConocoPhillips.
Financial Management —This measure is a subjective analysis of ConocoPhillips’ progress in managing the company’s capital profile and
liquidity needs.
Support of Strategic Corporate Initiatives —This measure is a subjective analysis of ConocoPhillips’ progress in implementing key elements of
its strategic initiatives including, but not limited to, cash returned to stockholders, financial management relationships, climate change,
reputation, people/diversity, culture, opportunity capture and execution of ConocoPhillips initiatives.
Business Unit Performance Criteria
There are approximately 100 discrete award units within ConocoPhillips designed to measure performance and to reward employees according
to business outcomes relevant to the award group. Although most employees participate in a single award unit designated for the operational or
functional group to which such employee is assigned, a senior officer can participate in a blend of the results of more than one of these award
units depending on the scope and breadth of his or her responsibilities over the performance period. Moreover, because ConocoPhillips’ CEO is
responsible for overall company performance, his award is based solely on individual and overall company performance.
Performance criteria are goals consistent with ConocoPhillips’ operating plan and include quantitative and qualitative metrics specific to each
business unit, such as income from continuing operations (adjusted to neutralize the impact of changes in commodity prices), control of costs,
health, safety and environmental performance, support of corporate initiatives, and various milestones set by management. At the conclusion of
82
Table of Contents
a performance period, management makes a recommendation based on the unit’s performance for the year against its performance criteria. The
HRCC then reviews management’s recommendation regarding each award unit’s performance and has discretion to adjust any such
recommendation in approving the final awards.
Individual Performance Criteria
Individual adjustments for our Named Executive Officers as senior officers of ConocoPhillips are approved by the HRCC, based on the
recommendation of the CEO of ConocoPhillips (other than for himself). The individual adjustment of the CEO of ConocoPhillips is
determined by the HRCC taking into account the prior review of the CEO’s performance, which is conducted jointly by the HRCC and the
Committee on Directors’ Affairs.
Tax-Based Program Criteria
ConocoPhillips’ incentive programs are also designed to conform to the requirements of Section 162(m) of the Code, which allows for
deductible compensation in excess of $1 million if certain criteria, including the attainment of pre-established performance criteria, are met. In
order for a Named Executive Officer to receive any award under either VCIP or PSP certain threshold criteria must be met. This tier of
performance measure and methodology is designed to meet requirements for deductibility of these items of compensation under Section
162(m) of the Code. Pursuant to this tier, maximum payments for the performance period under VCIP and PSP are set, but they are subject to
downward adjustment through the application of the generally applicable methodology for VCIP and PSP awards previously discussed, so this
effectively establishes a ceiling for VCIP and PSP payments to each of our Named Executive Officers. Performance criteria for the 2011
program year differed between the two programs, due primarily to VCIP being a one-year program while PSP is a three-year program. For the
2011 VCIP program, the criteria required that ConocoPhillips meet at least one of the following measures as a threshold to an award being
made to any of our Named Executive Officers: (1) top two-thirds of specified companies in improvement in return on capital employed
(adjusted net income); (2) top two-thirds of specified companies in total stockholder return; (3) top two-thirds of specified companies in cash
per BOE; or (4) cash from operations (normalized for the impact of asset sales and assumptions made in ConocoPhillips’ budgeting process as
to price for oil equivalents and excluding non-cash working capital) of at least $11.3 billion. For PSP, the criteria for the 2011 program year
required that ConocoPhillips meet at least one of the following measures as a threshold to an award being made to any of our Named Executive
Officers: (1) top two-thirds of specified companies in improvement in return on capital employed (adjusted net income); (2) top two-thirds of
specified companies in total stockholder return; (3) top two-thirds of specified companies in cash per BOE; or (4) cash from operations
(normalized for the impact of asset sales and assumptions made in ConocoPhillips’ budgeting process as to price for oil equivalents and
excluding non-cash working capital) of at least $39.4 billion. In both cases, the specified companies for comparison were ConocoPhillips, BP,
Chevron, ExxonMobil, Royal Dutch Shell and Total. The performance criteria for this purpose are set by the HRCC and may change from year
to year, although the criteria must come from a list of possible criteria set forth in the stockholder-approved 2009 Omnibus Stock and
Performance Incentive Plan. The award ceilings are also set by the HRCC each year, although they may not exceed limits set in the
stockholder-approved 2009 Omnibus Stock and Performance Incentive Plan. In May 2011, ConocoPhillips stockholders approved a successor
plan to the 2009 Omnibus Stock and Performance Incentive Plan, namely the 2011 Omnibus Stock and Performance Incentive Plan (2011
Plan). The 2011 Plan contains a list of performance criteria and award ceilings which are the same as those found in the earlier plan, except that
the total number of shares available for issuance under the 2011 Plan was increased to 100 million shares, inclusive of awards under prior plans
outstanding at the effective date of the 2011 Plan. Determination of whether the criteria are met is made by the HRCC after the end of each
performance period. Since the merger of companies that created ConocoPhillips in 2002, threshold criteria have always been met and the
ceiling has never been reached.
83
Table of Contents
Effects of the Separation on Outstanding Executive Compensation Awards
For a discussion of provisions concerning retirement, health and welfare benefits to our employees upon completion of the separation, see
“Certain Relationships and Related Transactions—Agreements with ConocoPhillips—Employee Matters Agreement.” The separation is not a
change-in-control and therefore will not entitle Phillips 66 officers to any change-in-control benefits.
Equity-Based Compensation
Following the separation, all holders of exercisable awards of stock options and stock appreciation rights will receive both adjusted
ConocoPhillips awards and Phillips 66 awards. Similarly, employees who hold unrestricted stock acquired through past equity awards will be
treated like all other ConocoPhillips stockholders in the distribution. Each employee holder of unexercisable stock options will hold options
only in the company that employs such employee following the separation. There are no unexercisable stock appreciation rights outstanding.
Employee holders of restricted stock and performance share units awarded for completed performance periods under the PSP (and equivalent
predecessor programs) will receive both adjusted ConocoPhillips awards and Phillips 66 awards. Each employee holder of restricted stock and
restricted stock units awarded under all other programs will hold restricted shares or restricted stock units in the company that employs such
employee following the separation. In addition, former employee holders and a specified group of holders of previously unvested stock options
and restricted stock units, who are retiring or terminating employment upon or shortly after the separation, will receive both adjusted
ConocoPhillips awards and Phillips 66 awards (and the specified group will be vested in their option awards made in 2012). See also “Certain
Relationships and Related Transactions—Agreements with ConocoPhillips—Employee Matters Agreement.”
Ongoing PSP Periods
Under ConocoPhillips’ executive compensation program, each of our Named Executive Officers participates in the PSP. The PSP rewards
executives based on their individual performances and the performance of ConocoPhillips over a three-year period. Each year the HRCC
establishes a three-year performance period over which it compares the performance of ConocoPhillips with that of its
performance-measurement peer group using pre-established criteria. Thus, in any given year, there are usually three overlapping, ongoing
performance periods.
In contemplation of the separation, the HRCC deferred establishment of a three-year PSP performance period for the 2012-2014 period.
Therefore, assuming that the distribution occurs in the second quarter of 2012, two performance periods will be affected as a result of the
separation: the 2010-2012 PSP performance period and the 2011-2013 PSP performance period.
We anticipate that the HRCC will approve a prorated award under these two PSP periods to ConocoPhillips and Phillips 66 participants prior to
the distribution date. This award will be based on performance under the criteria established for such periods through the date of the separation.
To replace the portion of the awards that will be forgone as a result of the proration described above, we anticipate that the HRCC and our
Compensation Committee will each establish prorated performance periods for affected officers and establish a new performance period for
2012-2014. The performance criteria for these prorated periods and the 2012-2014 period will be established by the respective Compensation
Committees of ConocoPhillips and Phillips 66 following the separation.
84
Table of Contents
Phillips 66 Compensation Programs
We believe the ConocoPhillips executive compensation programs are effective both at retaining and motivating Phillips 66 officers and
competitive as compared to compensation programs at other downstream peer companies. We expect the executive compensation programs
that will initially be adopted by Phillips 66 will be very similar to those in place at ConocoPhillips immediately prior to the separation.
However, after the separation, our Human Resources and Compensation Committee will continue to evaluate our compensation and benefit
programs and may make adjustments as necessary to meet prevailing business needs.
85
Table of Contents
EXECUTIVE COMPENSATION
Each of our Named Executive Officers was employed by ConocoPhillips or its subsidiaries prior to the separation; therefore, the information
provided for the years 2011, 2010 and 2009 reflects compensation earned at ConocoPhillips or its subsidiaries (referred to as “the Company” in
the executive compensation disclosures) and the design and objectives of the executive compensation programs in place prior to the separation.
Compensation decisions for our Named Executive Officers prior to the separation were made by ConocoPhillips. Each of our Named Executive
Officers is a senior officer of ConocoPhillips. Accordingly, the compensation decisions with respect to 2011 were made by the Human
Resources and Compensation Committee of ConocoPhillips (HRCC or Committee), which is composed entirely of independent
directors. Executive compensation decisions following the separation will be made by the Human Resources and Compensation Committee of
Phillips 66 (our “Compensation Committee”), which also will be composed entirely of independent directors.
86
Table of Contents
Summary Compensation Table
The Summary Compensation Table below reflects amounts earned with respect to 2011 and performance periods ending in 2011. We have
excluded arrangements that are generally available to our U.S.-based salaried employees, such as our medical, dental, life and accident
insurance, disability, and health savings and flexible spending account arrangements, since all of our Named Executive Officers are U.S.-based
salaried employees. Based on the salary and total compensation amounts for Named Executive Officers for 2011 shown in the table below,
salary accounted for approximately 8 percent of the total compensation of our Named Executive Officers and incentive compensation programs
(stock awards, option awards, and non-equity incentive plan compensation) accounted for approximately 58 percent. For the CEO alone in
2011, salary accounted for approximately 5 percent of his total compensation and incentive compensation programs accounted for
approximately 63 percent of his total compensation. These numbers reflect the emphasis placed on performance-based pay.
Name and
Principal Position
J.J. Mulva
Chairman, President & CEO
G.C. Garland
Senior Vice President,
Exploration &
Production—Americas
W.C.W. Chiang
Senior Vice President, Refining,
Marketing, Transportation &
Commercial
A.J. Hirshberg
Senior Vice President, Planning
and Strategy
J.W. Sheets
Senior Vice President, Finance,
and CFO
Option
Awards
($) (4)
6,487,950
5,737,680
Non-Equity
Incentive Plan
Compensation
($) (5)
3,543,750
4,252,500
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($) (6)
8,533,648
-
Year
2011
2010
Salary ($)
(1)
1,500,000
1,500,000
Bonus ($)
(2)
-
Stock
Awards
($) (3)
7,384,724
6,148,572
All Other
Compensation
($) (7)
263,522
294,143
Total
($)
27,713,594
17,932,895 (8)
2009
1,500,000
-
5,669,518
5,737,576
1,278,788
-
202,779
14,388,661 (8)
2011
750,500
-
1,361,687
1,197,390
1,105,449
1,462,522
123,887
6,001,435
2010
173,011
-
2,819,115
-
272,699
2,005,824
26,132
5,296,781
2009
-
-
-
-
-
-
-
-
2011
750,500
-
1,361,687
1,197,390
971,860
96,107
125,154
4,502,698
2010
643,758
-
1,426,584
920,790
917,338
153,873
71,644
4,133,987
2009
575,508
-
882,436
893,282
557,920
137,601
63,610
3,110,357
2011
750,500
-
1,361,687
1,197,390
1,039,990
5,407,899
176,618
9,934,084
2010
173,011
9,357,436
4,719,144
-
270,389
359,280
10,910
14,890,170
2009
-
-
-
-
-
-
-
-
2011
619,500
-
1,451,661
729,790
784,132
1,473,218
87,404
5,145,705
2010
496,840
-
880,262
489,060
696,942
699,405
58,571
3,321,080
2009
461,000
-
468,796
475,150
437,950
616,475
41,707
2,501,078
(1)
Includes any amounts that were voluntarily deferred to the Key Employee Deferred Compensation Plan.
(2)
Because our primary short-term incentive compensation arrangement for salaried employees (the VCIP) has mandatory performance
measures that must be achieved before there is any payout to Named Executive Officers, amounts paid under VCIP are shown in the
Non-Equity Incentive Plan Compensation column of the table, rather than the Bonus column. As an inducement to his employment, the
HRCC approved (i) a bonus payment to Mr. Hirshberg of $3,000,000 at his employment on October 6, 2010, and (ii) the creation of a
deferred compensation account under the Key Employee Deferred Compensation Plan, credited with $6,357,436, vesting as to 47
percent on the first anniversary of employment, as to 47 percent on the second anniversary of employment, and as to the remainder on
the third anniversary of employment.
87
Table of Contents
(3)
Amounts shown represent the aggregate grant date fair value of awards made under the PSP during each of the years indicated, as
determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718.
See the “Share-Based Compensation Plans” section of Note 16—Employee Benefit Plans, in the Notes to Combined Financial
Statements included elsewhere in this Information Statement for a discussion of the relevant assumptions used in this determination.
The amounts shown for stock awards are from our PSP or for off-cycle awards, although no off-cycle awards were granted to any of the
Named Executive Officers during 2011, 2010, or 2009, except for off-cycle awards to Messrs. Garland and Hirshberg at their
employment on October 6, 2010, as discussed further below. These may include awards that are expected to be finalized as late as 2014.
The amounts shown for awards from PSP relate to the three-year performance period that began in the years presented. Performance
periods under PSP generally cover a three-year period and, as a new performance period has begun each year since the program
commenced, there are three overlapping performance periods ongoing at any time.
Amounts shown are target awards for 2011, 2010, and 2009, since it is most probable at the setting of the target for the applicable
performance periods that targets will be achieved. If payout was made at maximum levels for company performance and excluding any
individual adjustments, the amounts shown would double from the targets shown, although the value of the actual payout would be
dependent upon the stock price at the time of the payout. If payout was made at minimum levels, the amounts would be reduced to zero.
No adjustment is made to the target shown for prior years based upon any change in probability subsequent to the time the target is set.
Changes to targets resulting from promotion or demotion of a Named Executive Officer are shown as awards in the year of the
promotion or demotion, even though the awards may relate to a program period that began in an earlier year. Actual payouts with
regard to the targets set for 2009 were approved by the HRCC at its February 2012 meeting, at which the Committee determined the
payouts to be made to Senior Officers (including the Named Executive Officers) for the performance period that began in 2009 and
ended in 2011. Those payouts were as follows (with values shown at fair market value on the date of payout): Mr. Mulva, $18,482,664;
Mr. Chiang, $2,889,605; Mr. Garland, $1,541,468; Mr. Hirshberg, $1,477,216; and Mr. Sheets, $1,997,483.
Awards under PSP are made in restricted stock or restricted stock units that will generally be forfeited if the employee is terminated
prior to the end of the escrow period set in the award (other than for death or following disability or after a change in control). For
target awards for program periods beginning in 2008 and earlier, the escrow period lasts until separation from service, except in the
cases of termination due to death, layoff, or retirement, or after disability or a change in control, when the escrow period ends at the
exceptional termination event. For target awards for program periods beginning in 2009 and later, the escrow period lasts five years
from the grant of the award (which would be more than eight years after the beginning of the program period, when measured including
the performance period) unless the employee makes an election prior to the beginning of the program period to have the escrow period
last until separation from service instead; except that in the cases of termination due to death, layoff, or retirement, or after disability or
a change in control, the escrow period ends at the exceptional termination event. In the event of termination due to layoff or retirement
after age 55 with five years of service, a value for the forfeited restricted stock or restricted stock units will generally be credited to a
deferred compensation account for the employee for awards made prior to 2005; for later awards, restrictions lapse in the event of
termination due to layoff or early retirement after age 55 with five years of service, unless the employee has elected to defer receipt of
the stock until a later time.
88
Table of Contents
Messrs. Garland and Hirshberg became employees of ConocoPhillips on October 6, 2010. As inducements to their employment, the
HRCC approved the grant of certain restricted stock units to each, effective on the date of employment. Mr. Garland received 16,877
units (valued at $999,962), the restrictions on which lapse as to one-half of the units on the first anniversary of his employment, while
the restrictions on the remainder lapse on the second anniversary of his employment. Mr. Hirshberg received 48,945 units (valued at
$2,899,991), the restrictions on which lapse on the third anniversary of his employment. Other terms and conditions of the restricted
stock unit awards for each officer reflect the standard terms and conditions of restricted stock unit awards under PSP. The amounts for
2010 reflected in the Table include these awards, as well as their target awards under PSP.
(4)
Amounts represent the dollar amount recognized as the aggregate grant date fair value, as determined in accordance with FASB ASC
Topic 718. See the “Share-Based Compensation Plans” section of Note 16—Employee Benefit Plans, in the Notes to Combined
Financial Statements included elsewhere in this Information Statement for a discussion of the relevant assumptions used in this
determination. All such options were awarded under ConocoPhillips’ Stock Option Program. Options awarded to Named Executive
Officers under that program generally vest in three equal annual installments beginning with the first anniversary from the date of grant
and expire ten years after the date of grant. However, in the event that a Named Executive Officer has attained the early retirement age
of 55 with five years of service, the value of the options granted is taken in the year of grant or over the number of months until the
executive attains age 55 with five years of service.
Option awards are made in February of each year at a regularly-scheduled meeting of the HRCC. Occasionally, option awards may be
made at other times, such as upon the commencement of employment of an individual. In determining the number of shares to be
subject to these option grants, the HRCC used a Black-Scholes-Merton-based methodology to value the options.
(5)
Includes amounts paid under VCIP, our primary non-equity short-term incentive arrangement, and includes amounts that were
voluntarily deferred to the Key Employee Deferred Compensation Plan. See also note (2) above.
(6)
Amounts represent the actuarial increase in the present value of the Named Executive Officer’s benefits under all pension plans
maintained by us determined using interest rate and mortality rate assumptions consistent with those used in our financial statements.
Interest rates assumption changes have a significant impact on the pension values with periods of lower interest rates having the effect
of increasing the actuarial values reported and vice versa.
(7)
As discussed in Compensation Discussion and Analysis, we provide our executives with a number of compensation and benefit
arrangements. The tables below reflect amounts earned under those arrangements. We have excluded arrangements that are generally
available to our U.S.-based salaried employees, such as our medical, dental, life and accident insurance, disability, and health savings
and flexible spending account arrangements, since all of our Named Executive Officers are U.S.-based salaried employees. Certain of
the amounts reflected below were paid in local currencies, which we value in this table in U.S. dollars using a monthly currency
valuation for the month in which costs were incurred. All Other Compensation includes the following amounts, which were determined
using actual cost paid unless otherwise noted:
89
Table of Contents
J.J. Mulva
G.C.
Garland
W.C.W.
Chiang
A.J.
Hirshberg
J.W.
Sheets
Company
Contributions
to
Non-Qualified
Defined
Contribution
Plans
($) (j)
158,088
121,225
119,818
Annual
Physical
($) (d)
2,689
1,964
Executive
Group
Life
Insurance
Premiums
($) (e)
22,860
11,880
11,880
Tax
Reimbursement
Gross-Up
($) (f)
19,904
65,045
17,954
Relocation
($) (g)
-
Matching
Gift
Program
($) (h)
15,000
15,000
18,000
-
-
2,072
334
-
679
-
68,389
15,106
-
-
32,372
10,692
-
20,375
-
-
-
1,207
2,072
1,777
1,036
14,700
6,353
2,322
-
14,972
15,000
15,000
32,372
14,651
13,947
58,827
33,863
30,098
-
-
-
-
2,072
218
-
5,338
-
113,761
-
2,700
-
32,372
10,692
-
20,375
-
-
-
-
-
1,710
1,371
1,272
5,213
1,825
1,109
-
13,500
13,500
5,500
32,255
15,396
14,107
34,726
26,479
19,719
2011
2010
2009
Personal
Use of
Company
Aircraft
($) (a)
31,274
3,375
Automobile
Provided
by
Company
($) (b)
15,298
32,379
14,967
Home
Security
($) (c)
874
2011
2010
2009
-
-
2011
2010
2009
2,211
-
2011
2010
2009
2011
2010
2009
Name
Matching
Contributions
Under
the
Tax-Qualified
Savings Plans
($) (i)
32,372
14,651
13,947
(a)
The Comprehensive Security Program of the Company requires that Mr. Mulva fly on Company aircraft, unless a determination
is made by the Manager of Global Security that other arrangements are an acceptable risk. Numbers above represent the
approximate incremental cost to ConocoPhillips for personal use of the aircraft, including travel for any family member or
guest. Approximate incremental cost has been determined by calculating the variable costs for each aircraft during the year,
dividing that amount by the total number of miles flown by that aircraft, and multiplying the result by the miles flown for
personal use during the year. There were no incremental costs associated with flights to the Company hangar or other locations
without passengers, commonly referred to as “deadhead” flights. In 2007, the Company and Mr. Mulva entered into a Time
Share Agreement with regard to certain of the Company’s aircraft, pursuant to which Mr. Mulva agreed to reimburse the
Company for his personal use of the aircraft, subject to certain limitations required by the Federal Aviation Administration. The
amounts shown for incremental costs related to the personal use of an aircraft by Mr. Mulva reflect the net incremental costs to
the Company after giving effect to any reimbursements received under the Time Share Agreement. In 2011, the reimbursement
from Mr. Mulva was greater than the aggregate incremental cost.
(b)
The value shown in the table represents the approximate incremental cost to the Company of providing and maintaining an
automobile, excluding Company security personnel. Approximate incremental cost was calculated using actual expenses
incurred during the year. Other executives and employees of the Company may also be required to use Company-provided
transportation and security personnel, especially when traveling or living outside of the United States, in accordance with risk
assessments made by the Company’s Manager of Global Security.
(c)
The use of a home security system is required as part of ConocoPhillips’ Comprehensive Security Program for certain
executives and employees, including the Named Executive Officers, based on risk assessments made by the Company’s
Manager of Global Security. Amounts shown represent the approximate incremental cost to ConocoPhillips for the installation
and maintenance of the home security system with features required by the Company in excess of the cost of a “standard”
system typical for homes in the neighborhoods where the Named Executive Officers’ homes are located. The Named Executive
Officer pays the cost of the “standard” system himself. No charges have been incurred under this program since 2009.
90
Table of Contents
(8)
(d)
Historically, the Company maintained a program under which costs associated with annual physical examinations of eligible
employees, including the Named Executive Officers, were paid for by the Company. This program was discontinued effective at
the end of 2010.
(e)
The amounts shown are for premiums paid by the Company for executive group life insurance provided by the Company, with a
value equal to the employee’s annual salary. In addition, certain employees of the Company, including the Named Executive
Officers, are eligible to purchase group variable universal life insurance policies for which the employee pays all costs, so that
there is no incremental cost to the Company.
(f)
The amounts shown are for payments by the Company relating to certain taxes incurred by the employee. These primarily occur
when the Company requests family members or other guests to accompany the employee to Company functions and, as a result,
the employee is deemed to make a personal use of Company assets (for example, when a spouse accompanies an employee on a
Company aircraft). The Company believes that such travel is appropriately characterized as a business expense and, if the
employee is imputed income in accordance with the applicable tax laws, the Company will generally reimburse the employee
for any increased tax costs.
(g)
These amounts reflect relocation expenses approved by the HRCC in the offer letters to Mr. Garland and Mr. Hirshberg in
connection with their hiring. The amounts were calculated pursuant to the standard relocation policy of the Company.
(h)
The Company maintains a Matching Gift Program under which certain gifts by employees to qualified educational or charitable
institutions are matched. For executives, the program matches up to $15,000 with regard to each program year. Administration
of the program can cause more than $15,000 to be paid in a single fiscal year of the Company, due to processing claims from
more than one program year in that single fiscal year. The amounts shown are for the actual payments by the Company during
the year. In December 2009, the Board of Directors approved changes in the Matching Gift Program provisions for employees
that brought it into parity with the provisions for executives, effective in 2010.
(i)
Under the terms of its tax-qualified defined contribution plans, the Company makes matching contributions and allocations to
the accounts of its eligible employees, including the Named Executive Officers.
(j)
Under the terms of its nonqualified defined contribution plans, the Company makes contributions to the accounts of its eligible
employees, including the Named Executive Officers. See the narrative, table, and notes to the “Nonqualified Deferred
Compensation Table” for further information.
In accordance with SEC rules prohibiting issuers from reporting a negative value in the “Change in Pension Value and Nonqualified
Deferred Compensation Earnings” column, Mr. Mulva’s total compensation excludes the effect of a $246,639 decrease in the net
present value of Mr. Mulva’s pension benefits in 2010 and a $7,885,466 decrease in the net present value of Mr. Mulva’s pension
benefits in 2009. Including the effects of these decreases in value, Mr. Mulva’s total compensation, as reported in the Summary
Compensation Table, would have been $17,686,256 in 2010 and $6,503,195 in 2009.
91
Table of Contents
Grants of Plan-Based Awards Table
The Grants of Plan-Based Awards Table is used to show participation by the Named Executive Officers in the incentive compensation
arrangements described below.
The columns under the heading “Estimated Future Payouts Under Non-Equity Incentive Plan Awards” show information regarding the VCIP.
The amounts shown are those applicable to the 2011 program year using a minimum of zero and a maximum of 250 percent of VCIP target for
each participant and do not represent actual payouts for that program year. Actual payouts for the 2011 program year were made in February
2012 and are shown in the Summary Compensation Table under the “Non-Equity Incentive Plan Compensation” column.
The columns under the heading “Estimated Future Payouts Under Equity Incentive Plan Awards” show information regarding PSP. The
amounts shown are those set for 2011 compensation tied to the 2011 through 2013 program period under PSP (PSP IX) and do not represent
actual payouts for that program year.
The “All Other Option Awards” column reflects option awards granted under the Stock Option Program. The option awards shown were
granted on the same day that the target was approved. For the 2011 program year under the Stock Option Program, targets were set and awards
granted at the regularly scheduled February 2011 meeting of the HRCC.
Name
Grant
Date(1)
J.J. Mulva
2/10/2011
2/10/2011
G.C.
Garland
Maximum
($)
5,062,500
-
Estimated Future Payouts
Under Equity Incentive Plan
Awards (3)
Threshold
Target
Maximum
(#)
(#)
(#)
105,308
210,616
-
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#) (4)
Exercise
or Base
Price Of
Options
Awards
Average
Price
($Sh)
(5)
Exercise
or Base
Price Of
Options
Awards
Closing
Price
($Sh)
(6)
Grant Date
Fair Value
of Stock
and
Options
Awards (7)
-
388,500
70.13
70.08
7,384,724
6,487,950
2/10/2011
2/10/2011
-
667,945
-
1,669,863
-
-
19,418
-
38,836
-
-
71,700
70.13
70.08
1,361,687
1,197,390
2/10/2011
2/10/2011
-
667,945
-
1,669,863
-
-
19,418
-
38,836
-
-
71,700
70.13
70.08
1,361,687
1,197,390
2/10/2011
2/10/2011
-
667,945
-
1,669,863
-
-
19,418
-
38,836
-
-
71,700
70.13
70.08
1,361,687
1,197,390
1/1/2011
1/1/2011
2/10/2011
2/10/2011
-
514,185
-
1,285,463
-
-
1,814
3,699
15,339
-
3,628
7,398
30,678
-
-
43,700
70.13
70.08
123,724
252,290
1,075,647
729,790
W.C.W.
Chiang
A.J.
Hirshberg
J.W.
Sheets
(1)
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards (2)
Threshold
Target
($)
($)
2,025,000
-
All
Other
Stock
Awards:
Number
of
Shares
of Stock
or Units
(#)
The grant date shown is the date on which the HRCC approved the target awards, except with regard to the January 1, 2011, award
shown for Mr. Sheets. With regard to Mr. Sheets, under the terms of the PSP, an adjustment in the target and maximum awards under
three on-going performance periods automatically occurred on the effective date of his promotion, which was effective January 1, 2011,
and was approved by the HRCC.
92
Table of Contents
(2)
Threshold and maximum awards are based on the program provisions under the VCIP. Actual awards earned can range from zero to
200 percent of the target awards for corporate and business unit performance, with a further possible adjustment of up to 50 percent of
the target awards for individual performance. Amounts reflect estimated possible cash payouts under the VCIP after the close of the
performance period. The estimated amounts are calculated based on the applicable annual target and base salary for each Named
Executive Officer in effect for the 2011 performance period. If threshold levels of performance are not met, then the payout can be zero.
The HRCC also retains the authority to make awards under the program at its discretion, including the discretion to make awards
greater than the maximum payout. Actual payouts under the VCIP for 2011 are based on actual base salaries earned in 2011 and are
reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
(3)
Threshold and maximum are based on the program provisions under the PSP. Actual awards earned can range from zero to 200 percent
of the target awards. The HRCC retains the authority to make awards under the program at its discretion, including the discretion to
make awards greater than the maximum payout.
(4)
These amounts represent stock options granted during 2011.
(5)
The exercise price is the average of the high and low prices of ConocoPhillips common stock, as reported on the NYSE, on the date of
the grant (or on the last preceding date for which there was a reported sale, in the absence of any reported sales on the grant date);
therefore, on the grant date, the option has no immediately realizable value and any potential payout reflects an increase in share price
after the grant date. ConocoPhillips’ stockholder-approved 2011 Omnibus Stock and Performance Incentive Plan provides for the use of
such an average price in setting the exercise price on options, unless the HRCC directs otherwise. The immediate predecessor plans, the
stockholder-approved 2004 and 2009 Omnibus Stock and Performance Incentive Plans, had the same provision. Grants made before
May 13, 2009, were made under the 2004 Plan and grants made before May 11, 2011, but after May 12, 2009, were made under the
2009 Plan.
(6)
The closing price is the closing price of ConocoPhillips common stock, as reported on the NYSE, on the date of the grant.
(7)
For equity incentive plan awards, these amounts represent the grant date fair value at target level under PSP as determined pursuant to
FASB ASC Topic 718. For option awards, these amounts represent the grant date fair value of the option awards using a
Black-Scholes-Merton-based methodology to value the options. Actual value realized upon option exercise depends on market prices at
the time of exercise. For other stock awards, these amounts represent the grant date fair value of the restricted stock or restricted stock
unit awards determined pursuant to FASB ASC Topic 718. See the “Share-Based Compensation Plans” section of Note 16—Employee
Benefit Plans, in the Notes to Combined Financial Statements included elsewhere in this Information Statement for a discussion of the
relevant assumptions used in this determination.
93
Table of Contents
Outstanding Equity Awards At Fiscal Year-End
Option Awards (1)
Nam
e
J.J. Mulva
G.C. Garland
W.C.W. Chiang
A.J. Hirshberg
J.W. Sheets
Stock Awards (6)
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable (2)
12,738
413,062
606,000
745,200
392,800
268,800
276,500
296,400
342,133
163,466
-
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
171,067 (3)
326,934 (4)
388,500 (5)
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
-
-
71,700 (5)
-
70.125
2/10/2021
21,600
18,400
28,400
20,800
14,600
15,800
31,500
53,266
26,233
-
26,634 (3)
52,467 (4)
71,700 (5)
-
23.550
24.370
32.810
47.830
59.075
66.370
79.380
45.470
48.385
70.125
10/22/2012
2/10/2013
2/8/2014
2/4/2015
2/10/2016
2/8/2017
2/14/2018
2/12/2019
2/12/2020
2/10/2021
-
71,700 (5)
-
70.125
2/10/2021
5,238
25,800
29,400
22,400
15,500
17,100
16,900
28,333
13,933
-
14,167 (3)
27,867 (4)
43,700 (5)
-
Option
Exercise
Price
($)
23.550
23.550
24.370
32.810
47.830
59.075
66.370
79.380
45.470
48.385
70.125
Option
Expiration
Date
10/22/2012
10/22/2012
2/10/2013
2/8/2014
2/4/2015
2/10/2016
2/8/2017
2/14/2018
2/12/2019
2/12/2020
2/10/2021
23.550
24.370
32.810
47.830
59.075
66.370
79.380
45.470
48.385
70.125
10/22/2012
2/10/2013
2/8/2014
2/4/2015
2/10/2016
2/8/2017
2/14/2018
2/12/2019
2/12/2020
2/10/2021
Number
of Shares
or Units
of Stock
That
Have
Not
Vested
(#)
3,257,121
Market
Value
of Shares
or Units of
Stock That
Have Not
Vested ($)
237,346,407
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
232,384
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested ($)
16,933,822
29,887
2,177,866
39,289
2,862,989
120,696
8,795,118
44,382
3,234,116
69,499
5,064,392
39,289
2,862,989
108,798
7,928,110
33,787
2,462,059
(1)
All options shown in the table have a maximum term for exercise of ten years from the grant date. Under certain circumstances, the
terms for exercise may be shorter, and in certain circumstances, the options may be forfeited and cancelled. All awards shown in the
table have associated restrictions upon transferability.
(2)
The options shown in this column vested and became exercisable in 2011 or prior years (although under certain termination
circumstances, the options may still be forfeited). Options become exercisable in one-third increments on the first, second and third
anniversaries of the grant date.
94
Table of Contents
(3)
Represents the final one-third vesting of the February 12, 2009, grant, which became exercisable on February 12, 2012.
(4)
Represents the final two-thirds vesting of the February 12, 2010, grant, half of which became exercisable on February 12, 2012, and the
other half will become exercisable on February 12, 2013.
(5)
Represents the February 10, 2011, grant, one-third of which became exercisable on February 10, 2012, one-third of which will become
exercisable on February 10, 2013, and the final third will become exercisable on February 10, 2014.
(6)
No stock awards were made to the Named Executive Officers in 2011, except as a long-term incentive award under the PSP (shown in
the columns labeled “Stock Awards”) or pursuant to elections made by a Named Executive Officer to receive cash compensation in the
form of restricted stock units. Amounts above include PSP awards for the three-year performance period ending December 31, 2011
(PSP VII), as follows: Mr. Mulva, 257,168 shares; Mr. Chiang, 40,206 shares; Mr. Garland, 21,448 shares; Mr. Hirshberg, 20,554
shares; and Mr. Sheets, 27,793 shares. Stock awards shown in the columns entitled “Number of Shares or Units of Stock That Have Not
Vested” and “Market Value of Shares or Units of Stock That Have Not Vested” continue to have restrictions upon transferability.
Under the PSP, stock awards are made in the form of restricted stock units or restricted stock, the former having been used in the most
recent awards. The terms and conditions of both are substantially the same, requiring restriction on transferability until separation from
service from the Company, although for performance periods beginning in 2009, restrictions will lapse five years from the anniversary
of the grant date unless the employee has elected prior to the beginning of the performance period to defer the lapsing of such
restrictions until separation from service from the Company. Except in cases where the five-year provision applies, forfeiture is
expected to occur if the separation is not the result of death, disability, layoff, retirement after the executive has reached the age of 55
with five years of service, or after a change of control, although the HRCC has the authority to waive forfeiture. Restricted stock awards
have voting rights and pay dividends. Restricted stock unit awards have no voting rights and pay dividend equivalents. Dividend
equivalents, if any, on restricted stock units held are paid in cash or credited to each officer’s account in the form of additional stock
units. Neither pays dividends or dividend equivalents at preferential rates. Restricted stock held by the Named Executive Officers prior
to November 17, 2001, was converted to restricted stock units in 2002, with the original restrictions still in place. In addition to stock
awards actually granted, the Table reflects potential stock awards to Named Executive Officers under ongoing performance periods for
the PSP, for the performance periods from 2010 through 2012 and 2011 through 2013. These are shown at target levels in the columns
entitled “Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested” and “Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested.” There is no
assurance that these awards will be granted at, below, or above target after the end of the relevant performance periods, as the
determination of whether to make an actual grant and the amount of any actual grant for Named Executive Officers is within the
discretion of the HRCC. Until an actual grant is made, these target awards have no voting rights and pay no dividends or dividend
equivalents. Stock awards shown reflect the closing price of ConocoPhillips common stock, as reported on the NYSE, on December 30,
2011 ($72.87), the last trading day of 2011.
Amounts presented in the columns entitled “Number of Shares or Units of Stock That Have Not Vested” and “Market Value of Shares
or Units of Stock That Have Not Vested” represent restricted stock and restricted stock unit awards granted with respect to prior
periods. The plans and programs under which such grants were made provide that awards made in the form of restricted stock and
restricted stock units be held in such form until the recipient retires. If such awards immediately
95
Table of Contents
vested upon completion of the relevant performance period, as we are informed by our compensation consultant is more typical for
restricted stock programs, the amounts reflected in this column would be zero.
Option Exercises and Stock Vested
Name
J.J. Mulva
G.C. Garland (1)
W.C.W. Chiang
A.J. Hirshberg
J.W. Sheets
(1)
Option Awards
Number of Shares
Acquired on
Exercise (#)
3,478,000
-
Value Realized
Upon Exercise
($)
140,853,640
-
Stock Awards
Number of Shares
Acquired on Vesting
(#)
8,438
-
Value Realized
Upon Vesting
($)
537,290
-
As an inducement to his employment, the HRCC approved a grant of 16,877 restricted stock units to Mr. Garland, effective on the date
of employment, the restrictions on which lapse as to one-half of the units on the first anniversary of his employment, while the
restrictions on the remainder lapse on the second anniversary of his employment. The amounts reflected represent the lapsing of the
one-half of the units on his first anniversary of employment.
Pension Benefits
ConocoPhillips maintains several defined benefit plans for its eligible employees. With regard to U.S.-based salaried employees, the defined
benefit plan that is qualified under the Internal Revenue Code is the ConocoPhillips Retirement Plan (CPRP).
The CPRP is a non-contributory plan that is funded through a trust. The CPRP consists of eight titles, each one corresponding to a different
pension formula and having numerous other differences in terms and conditions. Employees are eligible for current participation in only one
title (although an employee may also have a frozen benefit under one or more other titles), and eligibility is based on the heritage company
from past mergers and acquisitions and time of hire. Of the Named Executive Officers, Messrs. Mulva, Garland, and Sheets (having been
employees of Phillips Petroleum Company) are eligible for, and vested in, benefits under Title I of the CPRP. Messrs. Chiang and Hirshberg
are eligible for (and Mr. Chiang is vested in) benefits under Title II (with Mr. Chiang, having been an employee of Tosco Corporation, also
having a frozen vested benefit under Title III, with regard to his participation prior to 2002). Titles I and III each provide a final average
earnings type of pension benefit for eligible employees payable at normal or early retirement from the Company. Under each of Titles I and III
normal retirement occurs upon termination on or after age 65. Under Title I, early retirement can occur at age 55 with five years of service (or
if laid off during or after the year in which the participant reaches age 50), while under Title III, early retirement can occur at age 55 with 10
years of service. Under Title I, early retirement benefits are reduced by five percent per year for each year before age 60 that benefits are paid,
but for benefits that commence at age 60 through age 65, the benefit is unreduced. Under Title III, early retirement benefits are reduced by 6.67
percent per year for each year before age 60, unless the participant has at least 85 points awarded, with one point awarded for each year of age
and one point awarded for each year of service; there is no reduction for a participant with 85 points or whose benefits begin at or after age 60
(provided the participant is also at least age 55 and has at least 10 years of service at the time of retirement). Mr. Mulva was retirement eligible
at the end of 2011. Messrs. Garland, Hirshberg, Sheets, and Chiang were not eligible for early retirement at the end of 2011. Under Titles I and
III employees become vested in the benefits after five years of service,
96
Table of Contents
and all of the Named Executive Officers are vested in their benefits under those Titles. Under Title II, employees become vested in their
benefits after three years of service. Mr. Chiang is vested in his benefits under Title II, while Mr. Hirshberg is not. Titles I and II allow the
employee to elect the form of benefit payment from among several annuity types or a single sum payment option, but all of the options are
actuarially equivalent. Title III allows the employee to elect the form of benefit payment from among several annuity types, without a single
sum payment option, but all of the options are actuarially equivalent. The election for form of benefit is made at retirement.
For Titles I and III, the benefit formula applicable to our eligible Named Executive Officers is the same. Retirement benefits are calculated as
the product of 1.6 percent times years of credited service multiplied by the final annual eligible average compensation. For Title I, final annual
eligible average compensation is calculated using the three highest consecutive years in the last ten calendar years before retirement plus the
year of retirement. For Title III, final annual eligible average compensation is calculated using the highest consecutive 36 months of
compensation in the last 120 months of service prior to retirement. In each case, such benefits are reduced by the product of 1.5 percent of the
annual primary Social Security (SS) benefit multiplied by years of credited service, although a maximum reduction limit of 50 percent may
apply in certain cases. The formula below provides an illustration as to how the retirement benefits are calculated. For purposes of the formula,
“pension compensation” denotes the final annual eligible average compensation described above.
[
1.6%
×
Pension
Compensation
×
Years of
Credited
Service
]
–
[
1.5%
×
Annual
Primary
SS
Benefit
×
Years of
Credited
Service
]
Eligible pension compensation generally includes salary and annual incentive compensation. However, under Title I, if an eligible employee
receives layoff benefits from the Company, eligible pension compensation includes the annualized salary for the year of layoff, rather than
actual salary, and years of credited service are increased by any period for which layoff benefits are calculated. Furthermore, certain foreign
service as an employee of Phillips Petroleum Company is counted as time and a quarter when determining the service element in the benefit
formula under Title I.
Benefits under Title II are based on monthly pay and interest credits to a cash balance account created on the first day of the month after a
participant’s hire date. Pay credits are equal to a percentage of total salary and bonus. Participants whose combined years of age and service
total less than 44 receive a 6 percent pay credit, those with 44 through 65 receive a 7 percent pay credit, and those with 66 or more receive a 9
percent pay credit. Normal retirement age is 65, but participants may receive their vested benefit upon termination of employment at any age.
Eligible pension compensation under Titles I, II, and III is limited in accordance with the Internal Revenue Code. In 2011, that limit was
$245,000. The Internal Revenue Code also limits the annual benefit (expressed as an annuity) available under Titles I, II and III. In 2011, that
limit was $195,000 (reduced actuarially for ages below 62).
In addition to the CPRP, the Company maintains several nonqualified pension plans. These are funded through the general assets of the
Company, although the Company also maintains trusts of the type generally known as “rabbi trusts” that may be used to pay benefits under the
nonqualified pension plans. The plan available to the Named Executive Officers is the ConocoPhillips Key Employee Supplemental Retirement
Plan (KESRP). This plan is designed to replace benefits that would otherwise not be received due to limitations contained in the Internal
Revenue Code that apply to qualified plans. The two such limitations that most frequently impact the benefits to employees are the limit on
compensation that can be
97
Table of Contents
taken into account in determining benefit accruals and the maximum annual pension benefit. In 2011, the former limit was set at $245,000,
while the latter was set at $195,000. The KESRP determines a benefit without regard to such limits, and then reduces that benefit by the
amount of benefit payable from the CPRP. Thus, in operation the combined benefits payable from the related plans for the eligible employee
equals the benefit that would have been paid if there had been no limitations imposed by the Internal Revenue Code. Benefits under KESRP are
generally paid in a single sum the later of age 55 or six months after retirement. When payments do not begin until after retirement, interest at
then current six-month Treasury-bill rates, under most circumstances, will be credited on the delayed benefits. Distribution may also be made
upon a determination of death or disability.
Certain foreign service as an employee of Phillips Petroleum Company is counted as time and a quarter when determining the service element
in the benefit formula under KESRP. Also under KESRP, certain incentive payments approved by the Phillips Petroleum Company Board of
Directors in 2000 are considered as pension compensation. Otherwise, the benefit formulas under KESRP take into account only actual service
with the employer and compensation arising from salary and annual incentive compensation (including annual incentive compensation that is
performance-based and is included in the Summary Compensation Table as Non-Equity Incentive Plan Compensation for that reason). The
footnotes below provide further detail on extra credited service and compensation.
Mr. Chiang was an employee of Tosco Corporation, which was acquired by Phillips Petroleum Company in 2001. In 2002, he and other
eligible employees of Phillips Petroleum Company, either of Phillips heritage or of Tosco heritage, were given the option either to remain in
their applicable existing final average earnings type of pension plan (now known as Title I for heritage Phillips employees and Title III for
heritage Tosco employees) or begin participation in a cash balance type of pension plan (Title II). Mr. Chiang elected to begin participating in
the cash balance plan. With regard to his frozen Title III benefits, a portion of the benefits paid by the ConocoPhillips plans may also be
reduced due to Mr. Chiang’s participation in certain plans of Unocal, a company at which he worked prior to certain assets of that company
being acquired by Tosco in 1997. The Table reflects the values of benefits for Mr. Chiang under both titles of the ConocoPhillips plan, as well
as under KESRP, but not the value estimated to be payable from the plans of Unocal.
Mr. Hirshberg was previously an employee of Exxon Mobil Corporation. In connection with his hiring by ConocoPhillips, the Company agreed
to provide Mr. Hirshberg with a benefit under KESRP equal to the benefit calculated under KESRP for a participant in Title I of CPRP,
reduced by actual benefits payable from CPRP or other ConocoPhillips plans and by estimated benefits payable from the plans of ExxonMobil.
Mr. Hirshberg is vested in the benefit payable under KESRP. The Table reflects that benefit, showing only the values payable from the plans of
ConocoPhillips, not from the plans of ExxonMobil.
98
Table of Contents
Except where otherwise noted, assumptions used in calculating the present value of accumulated benefits in the Table are found in Note
16—Employee Benefit Plans, in the Notes to Combined Financial Statements included elsewhere in this Information Statement.
Name
J.J. Mulva (2)
Number of
Years
Credited
Service
(#)
40
Plan Name
Title I—ConocoPhillips Retirement Plan
ConocoPhillips Key Employee Supplemental
Retirement Plan
G.C. Garland (3)
Title I—ConocoPhillips Retirement Plan
22
ConocoPhillips Key Employee Supplemental
Retirement Plan
W.C.W. Chiang (4)
J.W. Sheets
68,527,688
-
793,184
-
2,675,162
-
10
188,850
-
Title III—ConocoPhillips Retirement Plan
6
142,043
-
393,725
-
1
26,671
-
ConocoPhillips Key Employee Supplemental
Retirement Plan
29
5,740,508
-
Title I—ConocoPhillips Retirement Plan
32
1,208,454
-
4,256,304
-
Title II—ConocoPhillips Retirement Plan
ConocoPhillips Key Employee Supplemental
Retirement Plan
(1)
Payments
During Last
Fiscal Year
($)
-
Title II—ConocoPhillips Retirement Plan
ConocoPhillips Key Employee Supplemental
Retirement Plan
A.J. Hirshberg (5)
Present
Value of
Accumulated
Benefit
($)(1)
1,959,838
In determining the present value of the accumulated benefit for each Named Executive Officer, the eligible pension compensation (as
previously defined) used to calculate the amounts above as of December 31, 2011, for each Named Executive Officer is: Mr. Mulva,
$23,931,078; Mr. Garland, $1,196,210; Mr. Chiang, $544,167; Mr. Hirshberg, $1,193,901; and Mr. Sheets, $3,125,758. In determining
the present value of the accumulated benefit for Mr. Mulva, this takes into account as an element of pension compensation the value of
an off-cycle award of restricted stock and of an off-cycle performance incentive award both approved by the Phillips Petroleum
Company Compensation Committee in 2000, but with regard to which the performance conditions were met in 2005. The value of the
two off-cycle awards included as part of pension compensation for 2005 was $6,278,301 for Mr. Mulva.
99
Table of Contents
(2)
Includes additional credited service for Mr. Mulva of 18.25 months related to foreign assignments. With regard to this additional
credited service, the following amounts were included in the accumulated benefit shown in the pension table above: Mr. Mulva,
$2,684,060.
(3)
Mr. Garland became an employee of ConocoPhillips on October 6, 2010. Prior to joining ConocoPhillips, Mr. Garland was President
and Chief Executive Officer for Chevron Phillips Chemical Company LLC (CPChem). ConocoPhillips owns a 50 percent interest in
CPChem. None of the benefits earned by Mr. Garland as an employee of CPChem is included in the Table. The service credited to
Mr. Garland does not include his time of service with CPChem. However, prior to his service at CPChem, Mr. Garland had been an
employee of Phillips Petroleum Company, which became part of ConocoPhillips at merger in 2002. Mr. Garland’s service shown in the
table includes that prior service with Phillips Petroleum Company, in accordance with the standard terms and conditions of the
applicable plans.
(4)
Mr. Chiang is credited with a total of 16 years service under the titles and plans described above. The number of years of service
credited under Title III is frozen at 6.25 years of service, but the number of years of service counted under Title II increases each year
that Mr. Chiang remains employed with ConocoPhillips. Under Title II, and related provisions in KESRP, Mr. Chiang in 2011 received
pay credits equal to 9 percent of his pension compensation as, in 2011, his combined age and years of service exceeded 65. See the
narrative above for a discussion of this feature. For this purpose, years of service would include total years of service with
ConocoPhillips, which, in Mr. Chiang’s case, is 16.
(5)
Mr. Hirshberg became an employee of ConocoPhillips on October 6, 2010. Prior to joining ConocoPhillips, Mr. Hirshberg was
employed by Exxon Mobil Corporation and participated in its defined benefit plans. None of the benefits earned by Mr. Hirshberg as an
employee of Exxon Mobil Corporation is included in the Table. The service credited to Mr. Hirshberg does not include his time of
service with Exxon Mobil Corporation with regard to calculation of his benefit under Title II, but, pursuant to the offer letter and
resolutions approved by the HRCC in connection with his hire, service credited to Mr. Hirshberg with regard to calculation of his
benefit under KESRP does include his time of service with Exxon Mobil Corporation. This is reflected in the Table by showing
different service crediting periods for Mr. Hirshberg with regard to each of the plans. The service crediting period for Title II is also
included in the service crediting period for KESRP.
Nonqualified Deferred Compensation
ConocoPhillips maintains several nonqualified deferred compensation plans for its eligible employees. Those available to the Named Executive
Officers are described below.
The Key Employee Deferred Compensation Plan of ConocoPhillips (KEDCP) is a nonqualified deferral plan that permits certain key
employees to voluntarily reduce salary and request deferral of VCIP, or other similar annual incentive compensation program payments that
would otherwise be received in the subsequent year. The KEDCP permits eligible employees to defer compensation of up to 100 percent of
VCIP and up to 50 percent of salary. All of the Named Executive Officers are eligible to participate in the KEDCP.
Under the KEDCP, for amounts deferred and vested after December 31, 2004, the default distribution option is to receive a lump sum to be
paid at least six months after separation from service. Participants may elect to defer payments from one to five years after separation, and to
receive annual, semiannual or quarterly payments for a period of up to 15 years. For elections that set a date certain for payment, the
distribution will begin in the calendar quarter following the date requested and will be paid out on the distribution schedule elected by the
participant.
100
Table of Contents
For amounts deferred prior to January 1, 2005, a one-time revision of the ten annual installment payments schedule is allowed from 365 days to
no later than 90 days prior to retirement at age 55 or above or within 30 days after being notified of layoff in the calendar year in which the
employee is age 50 or above. Participants may receive distributions in one to 15 annual installments, two to 30 semi-annual installments or four
to 60 quarterly installments.
The Defined Contribution Make-Up Plan of ConocoPhillips (DCMP) is a nonqualified restoration plan under which the Company makes
employer contributions and stock allocations that cannot be made in the qualified ConocoPhillips Savings Plan (CPSP)—a defined contribution
plan of the type often referred to as a 401(k) plan—due to certain voluntary reductions of salary under the KEDCP or due to limitations
imposed by the Internal Revenue Code. For 2010, the Internal Revenue Code limited the amount of compensation that could be taken into
account in determining a benefit under the CPSP to $245,000. Employees make no contributions to the DCMP.
Under the DCMP, amounts vested after December 31, 2004, will be distributed as a lump sum six months after separation from service, or, at a
participant’s election, in one to 15 annual payments, no earlier than one year after separation from service. For amounts vested prior to
January 1, 2005, participants may, from 365 days to no later than 90 days prior to termination or within 30 days of being notified of layoff,
indicate a preference to defer the value into their account under the KEDCP.
Each participant directs investments of the individual accounts set up for that participant under both the KEDCP and DCMP. All
ConocoPhillips defined contribution nonqualified deferred compensation plans allow investment of deferred amounts in a broad range of
mutual funds or other market-based investments, including ConocoPhillips stock. As market-based investments, none of these provide
above-market returns. Since each executive participating in each plan chooses the investment vehicle or vehicles and may change his or her
allocations from time to time (as often as daily), the return on the investment will depend on how well the underlying investment fund
performed during the time the executive chose it as an investment vehicle. The aggregate performance of such investment is reflected in the
Nonqualified Deferred Compensation Table under the column “Aggregate Earnings in Last Fiscal Year.”
101
Table of Contents
Benefits due under each of the plans discussed above are paid from the general assets of the Company, although the Company also maintains
trusts of the type generally known as “rabbi trusts” that may be used to pay benefits under the plans. The trusts and the funds held in them are
assets of ConocoPhillips. In the event of bankruptcy, participants would be unsecured general creditors.
Name
J.J. Mulva
Beginning
Balance
($)
Executive
Contributions
in Last FY
($) (2)
Registrant
Contributions
in Last FY
($) (3)
Aggregate
Earnings
in Last FY
($) (4)
Aggregate
Withdrawals/
Distributions
($)
Aggregate
Balance
at Last
FYE
($) (5)
4,098,007
-
158,088
456,242
-
4,712,337
39,831,118
-
-
(162,752 )
-
39,668,366
35,657
-
20,375
3,717
-
59,749
Key Employee
Deferred
Compensation Plan
of ConocoPhillips
735,027
-
-
58,642
-
793,669
Defined
Contribution
Make-Up Plan of
ConocoPhillips
176,565
-
58,827
21,457
-
256,849
Key Employee
Deferred
Compensation Plan
of ConocoPhillips
200,395
-
-
7,137
-
207,532
-
-
20,375
(252 )
-
20,123
6,742,766
-
-
(213,151 )
186,533
-
34,726
21,837
-
243,096
1,756,008
837,759
-
195,106
-
2,788,873
Applicable
Plan (1)
Defined
Contribution
Make-Up Plan of
ConocoPhillips
Key Employee
Deferred
Compensation Plan
of ConocoPhillips
G.C.Garland
W.C.W.Chiang
A.J.Hirshberg (6)
Defined
Contribution
Make-Up Plan of
ConocoPhillips
Defined
Contribution
Make-Up Plan of
ConocoPhillips
Key Employee
Deferred
Compensation Plan
of ConocoPhillips
J.W. Sheets
Defined
Contribution
Make-Up Plan of
ConocoPhillips
Key Employee
Deferred
Compensation Plan
of ConocoPhillips
102
(2,995,829 )
3,533,786
Table of Contents
(1)
As of December 31, 2011, there were a total of 97 investment options, of which 41 were the same as those available in the Company’s
primary tax-qualified defined contribution plan for employees (its 401(k) plan, the ConocoPhillips Savings Plan) and of which 57 were
other various mutual fund options approved by an administrator designated by the relevant plan.
(2)
For Mr. Sheets this reflects $154,875 in salary and $682,884 in 2010 VCIP deferred in 2011 (included in the “Salary” column of the
Summary Compensation Table for 2011).
(3)
Reflects contributions by the Company under the DCMP in 2011 (included in the “All Other Compensation” column of the Summary
Compensation Table for 2011).
(4)
None of these earnings are included in the Summary Compensation Table for 2011.
(5)
Reflects contributions by our Named Executive Officers, contributions by the Company, and earnings on balances prior to 2011; plus
contributions by our Named Executive Officers, contributions by the Company, and earnings for 2011 (shown in the appropriate
columns of this table, with amounts that are included in the Summary Compensation Table for 2011 shown in footnotes (2), (3) and
(4) above).
(6)
Mr. Hirshberg became an employee of the Company on October 6, 2010. Pursuant to the terms of his offer letter (approved by the
HRCC), a KEDCP account was created for Mr. Hirshberg at the time of his employment and credited with $6,357,436. Forty-seven
percent of the account balance as of the first anniversary of his employment vested in 2011, 47 percent will vest on the second
anniversary of his employment, and the remainder will vest on the third anniversary of his employment. Distributions will occur on the
dates of vesting, unless Mr. Hirshberg has made timely elections to delay distribution. He did not elect to delay the distribution
regarding the vesting on the first anniversary of his employment.
Executive Severance and Changes in Control
Salary and other compensation for our Named Executive Officers is set by the HRCC, as described in “ Compensation Discussion and Analysis
” included elsewhere in this Information Statement. These officers may participate in the Company’s employee benefit plans and programs for
which they are eligible, in accordance with their terms.
Each of our Named Executive Officers is expected to receive amounts earned during his term of employment unless he voluntarily resigns prior
to becoming retirement eligible or is terminated for cause. Such amounts include:
•
VCIP earned during the fiscal year.
•
Grants pursuant to the PSP for the most-recently completed performance period and ongoing performance periods in which the
executive participated for at least one year.
•
Previously granted restricted stock and restricted stock units.
•
Vested stock option grants under the Stock Option Program.
•
Amounts contributed and vested under our defined contribution plans.
•
Amounts accrued and vested under our pension plans.
103
Table of Contents
While normal retirement age under our benefit plans is 65, early retirement provisions allow benefits at earlier ages if vesting requirements are
met, as discussed in the sections entitled “ Pension Benefits ” and “ Nonqualified Deferred Compensation .” For our compensation programs
(VCIP, Stock Option Program, and PSP), early retirement is generally defined to be termination at or after the age of 55 with five years of
service.
As of December 31, 2011, Mr. Mulva was retirement eligible under both our benefit plan and our compensation programs. As of December 31,
2011, Messrs. Hirshberg, Garland, Sheets, and Chiang had not met the early retirement criteria under either the applicable title of the pension
plan or of our compensation programs. Therefore, as of December 31, 2011, a voluntary resignation of Mr. Mulva would have been treated as a
retirement. Since Mr. Mulva was then eligible for retirement under these programs, he would be able to resign and retain all awards earned
under the PSP and earlier programs. As a result, the awards to Mr. Mulva under such programs are not included in the incremental amounts
reflected in the tables below. See “ Outstanding Equity Awards at Fiscal Year End ” for more information.
In addition, specific severance arrangements for executive officers, including the Named Executive Officers, are provided under two severance
plans of ConocoPhillips: the ConocoPhillips Executive Severance Plan (CPESP), available to a limited number of senior executives; and the
ConocoPhillips Key Employee Change in Control Severance Plan (CICSP), also available to a limited number of senior executives, but only
upon a change in control. These arrangements are described below. Executives are not entitled to participate in both plans as a result of a single
event.
ConocoPhillips Executive Severance Plan
The CPESP covers executives in salary grades generally corresponding to vice president and higher. The CPESP provides that if the Company
terminates the employment of a participant in the plan other than for cause, as defined in the plan, upon executing a general release of liability
and, if requested by the Company, an agreement not to compete with the Company, the participant will be entitled to:
•
A lump-sum cash payment equal to one-and-a-half or two times the sum of the employee’s base salary and current target VCIP.
•
A lump-sum cash payment equal to the present value of the increase in retirement benefits that would result from the crediting of an
additional one-and-a-half or two years to the employee’s number of years of age and service under the applicable retirement plan.
•
A lump-sum cash payment equal to the Company cost of certain welfare benefits for an additional one-and-a-half or two years.
•
Continuation in eligibility for a pro rata portion of the annual VCIP for which the employee is eligible in the year of termination.
•
Treatment as a layoff under the various compensation and equity programs of the Company – generally, layoff treatment will allow
executives to retain awards previously made and continue their eligibility under ongoing Company programs; thus, actual program
grants as restricted stock or restricted stock units would vest and the executive would remain eligible for awards attributable to
ongoing performance periods under the PSP in which they had participated for at least one year.
The CPESP may be amended or terminated by the Company at any time. Amounts payable under the plan will be offset by any payments or
benefits that are payable to the severed employee under any other plan, policy, or program of ConocoPhillips relating to severance, and
amounts may also be reduced in the event of willful and bad faith conduct demonstrably injurious to the Company, monetarily or otherwise.
104
Table of Contents
ConocoPhillips Key Employee Change in Control Severance Plan
The CICSP covers executives in salary grades generally corresponding to vice president and higher. The CICSP provides that if the
employment of a participant in the plan is terminated by the Company within two years of a “change in control” of ConocoPhillips, other than
for cause, or by the participant for good reason, as such terms are defined in the plan, upon executing a general release of liability, the
participant will be entitled to:
•
A lump-sum cash payment equal to two or three times the sum of the employee’s base salary and the higher of current target VCIP
or previous two years’ average VCIP.
•
A lump-sum cash payment equal to the present value of the increase in retirement benefits that would result from the crediting of an
additional two or three years to the employee’s number of years of age and service under the applicable retirement plan.
•
A lump-sum cash payment equal to the Company cost of certain welfare benefits for an additional two or three years.
•
Continuation in eligibility for a pro rata portion of the annual VCIP for which the employee is eligible in the year of termination.
•
If necessary, a gross-up payment sufficient to compensate the participant for the amount of any excise tax imposed on payments
made under the plan or otherwise pursuant to Section 4999 of the Code and for any taxes imposed on this additional payment,
although if the applicable payments are not more than 110 percent of the “safe harbor” amount under Section 280G of the Code, the
payments are “cut back” to the safe harbor amount rather than a gross-up payment being made.
Upon a change in control, the participant becomes eligible for vesting in all equity awards and lapsing of any restrictions, with continued ability
to exercise stock options for their remaining terms. After a change in control, the CICSP may not be amended or terminated if such amendment
would be adverse to the interests of any eligible employee, without the employee’s written consent. Amounts payable under the plan will be
offset by any payments or benefits that are payable to the severed employee under any other plan, policy, or program of ConocoPhillips relating
to severance, and amounts may also be reduced in the event of willful and bad faith conduct demonstrably injurious to the Company,
monetarily or otherwise.
Other Arrangements
Mr. Hirshberg became an employee of ConocoPhillips on October 6, 2010. The HRCC approved an offer letter to him which described the
terms and conditions of employment, including the fact that he would serve as an at-will employee. The letter also provided certain protections
against termination events. He will be considered to have been terminated by the Company if the Company terminates his employment either
without cause or if his employment is terminated by mutual agreement, or if he initiates the termination of his employment (but only if given
good reason to do so), prior to attaining age 55. Any severance benefits to which he may become entitled prior to attainment of age 55 will not
be less than the severance benefits provided under the letter, the CPESP, and the CICSP as those plans were in effect on the date of the letter.
Quantification of Severance Payments
The tables below reflect the amount of incremental compensation payable to each of our Named Executive Officers in the event of termination
of such executive’s employment other than as a result of voluntary resignation. The amount of compensation payable to each Named Executive
Officer upon involuntary
105
Table of Contents
not-for-cause termination, for-cause termination, termination following a change in control (CIC) (either involuntarily without cause or for
good reason) and in the event of the death or disability of the executive is shown below. The amounts shown assume that such termination was
effective as of December 31, 2011, and thus include amounts earned through such time and are estimates of the amounts which would be paid
out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of such executive’s
separation from the Company.
The following tables reflect additional incremental amounts to which each of our Named Executive Officers would be entitled if their
employment were terminated due to the events described above.
Executive Benefits and
Payments
Upon Termination
J.J. Mulva
Base Salary
Short-term Incentive
Variable Cash Incentive
Program
2009 - 2011 (performance
period)
2010 - 2012 (performance
period)
2011 - 2013 (performance
period)
Restricted Stock/Units from
prior performance
Stock Options/SARs:
Unvested and Accelerated
Incremental Pension
Post-employment Health &
Welfare
Life Insurance
280G Tax Gross-up
Involuntary
Not-for-Cause
Termination
(Not CIC)
($)
3,000,000
4,050,000
Death
($)
Disability
($)
-
4,500,000
8,296,932
-
-
-
(2,025,000 )
-
-
-
-
(18,739,832 )
-
-
-
-
(6,173,328 )
-
-
-
-
(2,557,956 )
-
-
-
-
(2,754,486 )
-
-
-
3,163,413
(13,758,648 )
-
4,745,119
-
-
1,110,212
-
3,000,000
-
-
18,652,263
3,000,000
-
Death
($)
Disability
($)
722,316
10,935,729
Executive Benefits and
Payments
Upon Termination
G.C. Garland
Base Salary
Short-term Incentive
Variable Cash Incentive
Program
2009 - 2011 (performance
period)
2010 - 2012 (performance
period)
2011 - 2013 (performance
period)
Restricted Stock/Units from
inducement grant
Stock Options/SARs:
For-Cause
Termination
($)
Involuntary
or Good
Reason
Termination
(CIC)
($)
(46,009,250 )
Involuntary
Not-for-Cause
Termination
(Not CIC)
($)
For-Cause
Termination
($)
Involuntary
or Good
Reason
Termination
(CIC)
($)
1,552,000
1,381,280
-
2,328,000
2,071,920
-
-
690,640
-
690,640
690,640
690,640
1,562,916
-
1,562,916
1,562,916
1,562,916
965,309
-
965,309
965,309
965,309
471,688
-
471,688
471,688
471,688
614,950
-
614,950
614,950
614,950
Unvested and Accelerated
Incremental Pension
Post-employment Health &
Welfare
Life Insurance
280G Tax Gross-up
180,415
2,442,169
-
196,817
2,913,242
196,817
-
196,817
-
28,625
-
-
42,037
3,184,639
1,552,000
-
-
9,889,992
-
15,042,158
6,054,320
4,502,320
106
Table of Contents
Executive Benefits and
Payments Upon Termination
W.C.W. Chiang
Base Salary
Short-term Incentive
Variable Cash Incentive
Program
2009—2011 (performance
period)
2010—2012 (performance
period)
2011—2013 (performance
period)
Restricted Stock/Units from
prior performance
Stock Options/SARs:
Unvested and
Accelerated
Incremental Pension
Post-employment Health &
Welfare
Life Insurance
280G Tax Gross-up
Executive Benefits and
Payments Upon Termination
A.J. Hirshberg
Base Salary
Short-term Incentive
Variable Cash Incentive Program
Key Employee Deferred
Compensation Plan
2009—2011 (performance period)
2010—2012 (performance period)
2011—2013 (performance period)
Restricted Stock/Units from
inducement grant
Stock Options/SARs:
Unvested and Accelerated
Incremental Pension
Post-employment Health & Welfare
Life Insurance
280G Tax Gross-up
For-Cause
Termination
($)
Involuntary
or Good
Reason
Termination
(CIC)
($)
Death
($)
Disability
($)
1,552,000
1,381,280
-
2,328,000
2,212,887
-
-
690,640
-
690,640
690,640
690,640
2,929,811
-
2,929,811
2,929,811
2,929,811
1,175,539
-
1,175,539
1,175,539
1,175,539
471,688
-
471,688
471,688
471,688
5,865,306
-
5,865,306
5,865,306
5,865,306
2,194,841
316,375
-
2,211,243
482,147
2,211,243
-
2,211,243
-
40,366
-
-
54,459
3,491,268
1,552,000
-
-
16,617,846
-
21,912,988
14,896,227
13,344,227
Involuntary
Not-for-Cause
Termination
(Not CIC)
($)
Involuntary
Not-for-Cause
Termination
(Not CIC)
($)
1,552,000
1,381,280
690,640
For-Cause
Termination
($)
Involuntary
or Good
Reason
Termination
(CIC)
($)
Death
($)
Disability
($)
-
2,328,000
2,071,920
690,640
690,640
690,640
1,497,770
965,309
471,688
(3,533,787 )
-
1,497,770
965,309
471,688
1,497,770
965,309
471,688
1,497,770
965,309
471,688
-
(3,566,622 )
-
-
-
196,817
4,743,808
130,835
3,469,332
196,817
1,552,000
-
196,817
-
16,566,119
5,374,224
3,822,224
180,415
4,320,871
92,376
11,152,349
(7,100,409 )
107
Table of Contents
Executive Benefits and
Payments Upon Termination
J.W. Sheets
Base Salary
Short-term Incentive
Variable Cash Incentive
Program
2009—2011 (performance
period)
2010—2012 (performance
period)
2011—2013 (performance
period)
Restricted Stock/Units from
prior performance
Stock Options/SARs:
Unvested and Accelerated
Incremental Pension
Post-employment Health &
Welfare
Life Insurance
280G Tax Gross-up
For-Cause
Termination
($)
Involuntary
or Good
Reason
Termination
(CIC)
($)
Death
($)
Disability
($)
1,278,000
1,060,740
-
1,917,000
1,702,338
-
-
530,370
-
530,370
530,370
530,370
2,025,276
-
2,025,276
2,025,276
2,025,276
835,892
-
835,892
835,892
835,892
372,584
-
372,584
372,584
372,584
4,893,731
-
4,893,731
4,893,731
4,893,731
1,180,459
3,373,991
-
1,190,456
4,211,836
1,190,456
-
1,190,456
-
30,580
-
-
41,695
3,546,474
1,278,000
-
-
15,581,623
-
21,267,652
11,126,309
9,848,309
Involuntary
Not-for-Cause
Termination
(Not CIC)
($)
Notes Applicable to All Termination Tables — In preparing each of the tables above, certain assumptions have been made. Benefits that
would be available generally to all or substantially all salaried employees on the U.S. payroll are not included in the amounts shown. The
following additional assumptions were also made:
•
Short-Term Incentives—For the short-term incentive amounts, in the event of an involuntary not-for-cause termination not related to
a change in control, the amount reflects two times current VCIP target, while in the event of an involuntary or good reason
termination related to a change in control, the amount reflects three times current VCIP target or three times the average of the prior
two VCIP payouts.
•
Variable Cash Incentive Program—For the VCIP amounts, in the event of an involuntary not-for-cause termination not related to a
change in control or an involuntary or good reason termination related to a change in control, the amount reflects the employee’s pro
rata current VCIP target. Targets for VCIP are for a full year, and are pro-rata for the Named Executive Officers based on time spent
in their respective positions.
•
Long-Term Incentives—For the performance periods related to PSP, amounts for the 2009-2011 period are shown at the payout
amount that was awarded in February 2012, while amounts for other periods are prorated to reflect the portion of the performance
period completed by the end of 2011. For the PSP awards of restricted stock and restricted stock units, amounts reflect the closing
price of ConocoPhillips common stock, as reported on the NYSE, on December 30, 2011 ($72.87), the last trading day of 2011.
•
Stock Options—For stock options with a December 30, 2011, ConocoPhillips common stock price higher than the option exercise
price, the amounts reflect the intrinsic value as if the options had been exercised on December 31, 2011, but only regarding the
options that the executive would
108
Table of Contents
have retained for the specific termination event. For options with a December 30, 2011, ConocoPhillips common stock price lower
than the option exercise price the amounts reflect a zero intrinsic value regarding the options that the executive would have retained
for the specific termination event.
•
Incremental Pension Values—For the incremental pension value, the amounts reflect the single sum value of the increment due to an
additional two years of age and service with associated pension compensation in the event of regular involuntary termination (three
years in the event of a CIC termination) regardless of whether the value is provided directly through a defined benefit plan or
through the relevant severance plan.
•
280G Tax Gross-up — Each Named Executive Officer is entitled, under the relevant change in control plan, to an associated “excise
tax gross-up” to the extent any change in control payment triggers the golden parachute excise tax provisions under Section 4999 of
the Code (within certain limitations). The following material assumptions were used to estimate executive excise taxes and
associated tax gross-ups:

Equity and PSP awards were valued at the closing price of ConocoPhillips stock, as reported on the NYSE, on
December 30, 2011 ($72.87).

Options are assumed exchanged and valued using a Black-Scholes-Merton-based option methodology.

Parachute payments for time vesting stock options, restricted stock and restricted stock units were valued using Treas. Reg.
Section 1.280G-1 Q&A 24(b) or (c) as applicable.

Calculations assume certain performance-based pay such as PSP awards and pro-rata VCIP payments are reasonable
compensation for services rendered prior to the CIC.
NON-EMPLOYEE DIRECTOR COMPENSATION
Our non-employee directors will receive compensation for their services on the Board of Directors. Following the separation, we expect our
director compensation programs and amounts will be structured similarly to those currently in place at ConocoPhillips. The primary elements
of our non-employee director compensation are expected to consist of an equity compensation program and a cash compensation program.
Information on ConocoPhillips’ 2011 non-employee director compensation is included below.
Objectives and Principles
Compensation for directors is reviewed annually by the Committee on Directors’ Affairs with the assistance of such third-party consultants as
the Committee deems advisable, and set by action of the Board of Directors. The Board’s goal in designing directors’ compensation is to
provide a competitive package that will enable it to attract and retain highly skilled individuals with relevant experience and that reflects the
time and talent required to serve on the board of a complex, multinational corporation. The Board seeks to provide sufficient flexibility in the
form of delivery to meet the needs of different individuals while ensuring that a substantial portion of directors’ compensation is linked to the
long-term success of ConocoPhillips. In furtherance of ConocoPhillips’ commitment to be a socially responsible member of the communities in
which it participates, the Board believes that it is appropriate to extend ConocoPhillips’ matching gift program to charitable contributions made
by individual directors as more fully described below.
109
Table of Contents
Equity Compensation
In 2011, non-employee directors received an annual grant of restricted stock units with an aggregate value of $170,000 on the date of grant.
Restrictions on the units issued to a non-employee director will lapse in the event of retirement, disability, death, or a change of control, unless
the director has elected to receive the shares after a stated period of time. Directors forfeit the units if, prior to the lapse of restrictions, the
Board finds sufficient cause for forfeiture (although no such finding can be made after a change of control). Before the restrictions lapse,
directors cannot sell or otherwise transfer the units, but the units are credited with dividend equivalents in the form of additional restricted stock
units. When restrictions lapse, directors will receive unrestricted shares of Company stock as settlement of the restricted stock units.
Cash Compensation
In 2011, all non-employee directors received $115,000 annual cash compensation. Non-employee directors serving in specified committee
positions also received the following additional cash compensation:
•
•
•
•
•
•
Director presiding over meetings of the non-employee directors—$25,000
Chair of the Audit and Finance Committee—$20,000
Chair of the Human Resources and Compensation Committee—$15,000
Chair of the other committees—$10,000
All other Audit and Finance Committee members—$7,500
All other Human Resources and Compensation Committee members—$5,000
The total annual compensation is payable in monthly cash installments. Directors may elect, on an annual basis, to receive all or part of their
cash compensation in unrestricted stock or in restricted stock units (such unrestricted stock or restricted stock units are issued on the last
business day of the month valued using the average of the high and the low market prices of ConocoPhillips common stock on such date), or to
have the amount credited to the director’s deferred compensation account.
Deferral of Compensation
Directors can elect to defer their cash compensation into the Deferred Compensation Program for Non-Employee Directors of ConocoPhillips
(Director Deferral Plan). Deferred amounts are deemed to be invested in various mutual funds and similar investment choices (including
ConocoPhillips common stock) selected by the director from a list of investment choices available under the Director Deferral Plan.
Other Compensation
The Board believes that it is important for spouses/significant others of directors and executive officers to attend certain meetings to enhance
the collegiality of the Board. The cost of such attendance is treated by the Internal Revenue Service as income, and as such is taxable to the
recipient. The Board believes that such costs are expenses of creating a collegial environment that enhances the effectiveness of the Board and
so it reimburses directors for the cost of resulting income taxes.
Stock Ownership
Directors are expected to own as much Company stock as the amounts of the annual equity grants during their first five years on the Board.
Directors are expected to reach this level of target ownership within five years of joining the Board. Actual shares of stock, restricted stock, or
restricted stock units, including deferred stock units, may be counted in satisfying the stock ownership guidelines.
110
Table of Contents
STOCK OWNERSHIP
As of the date of this Information Statement, all of the outstanding shares of Phillips 66 common stock are owned by ConocoPhillips. After the
distribution, ConocoPhillips will not directly or indirectly own any of our common stock. The following tables provide information with
respect to the expected beneficial ownership of Phillips 66 common stock by (1) each identified director nominee of Phillips 66, (2) each
Named Executive Officer, (3) all identified Phillips 66 executive officers and director nominees as a group (who, collectively, are expected to
beneficially own less than 1 percent of Phillips 66’s common stock), and (4) each of our stockholders who we believe will be a beneficial
owner of more than 5 percent of Phillips 66 outstanding common stock based on current publicly available information. We based the share
amounts on each person’s beneficial ownership of ConocoPhillips common stock as of February 15, 2012, and applying the distribution ratio of
one share of our common stock for every two shares of ConocoPhillips common stock held as of the record date, unless we indicate some other
date or basis for the share amounts in the applicable footnotes.
Except as otherwise noted in the footnotes below, each person or entity identified below is expected to have sole voting and investment power
with respect to such securities. Following the distribution, Phillips 66 will have outstanding an aggregate of approximately 640 million shares
of common stock based upon approximately 1,280 million shares of ConocoPhillips common stock outstanding on January 31, 2012, excluding
treasury shares and assuming no exercise of ConocoPhillips stock options or SARs or settlement of outstanding RSUs or PSUs in shares of
ConocoPhillips common stock, and applying the distribution ratio of one share of our common stock for every two shares of ConocoPhillips
common stock held as of the record date.
To the extent our directors and executive officers own ConocoPhillips common stock at the record date for the distribution, they will participate
in the distribution on the same terms as other holders of ConocoPhillips common stock.
The number of shares beneficially owned by each stockholder, director or officer is determined according to the rules of the SEC and the
information is not necessarily indicative of beneficial ownership for any other purpose. The mailing address for each of the directors and
executive officers is c/o Phillips 66, 600 N. Dairy Ashford, Houston, Texas 77079.
Holdings of Major Stockholders
The following table sets forth information regarding each stockholder who is expected, following the separation, to beneficially own more than
5 percent of our common stock (as of the date of such stockholder’s Schedule 13G filing with the SEC):
Common Stock
Number
of Shares
Name and Address
BlackRock Inc. (1)
40 East 52nd Street
New York, NY 10022
(1)
37,693,474
Percent
of Class
5.68 %
Based on a Schedule 13G filed with the SEC on February 13, 2012, by BlackRock Inc., on behalf of itself, BlackRock Japan Co. Ltd.,
BlackRock Advisors (UK) Limited, BlackRock Asset Management Deutschland AG, BlackRock Institutional Trust Company, N.A.,
BlackRock Fund Advisors, BlackRock Asset Management Canada Limited, BlackRock Asset Management Australia Limited,
111
Table of Contents
BlackRock Advisors, LLC, BlackRock Capital Management, Inc., BlackRock Financial Management, Inc., BlackRock Investment
Management, LLC, BlackRock Investment Management (Australia) Limited, BlackRock Investment Management (Korea) Ltd,
BlackRock (Luxembourg) S.A., BlackRock (Netherlands) B.V., BlackRock Fund Managers Limited, BlackRock Pensions Limited,
BlackRock Asset Management Ireland Limited, BlackRock International Limited, BlackRock Investment Management (UK) Limited.
Holdings of Directors and Executive Officers
The following table sets forth the number of shares of our common stock beneficially owned, based on the basis of presentation previously
described, as of February 15, 2012, by:
•
•
•
Each officer named in the Summary Compensation Table.
Each of the persons currently expected to serve as a director following the separation.
All of our directors and executive officers as a group.
Together these individuals beneficially own less than one percent of our common stock. For purposes of this table, shares are considered to be
“beneficially” owned if the person, directly or indirectly, has sole or shared voting or investment power with respect to such shares. In addition,
a person is deemed to beneficially own shares if that person has the right to acquire such shares within 60 days of February 15, 2012.
Number of Shares or
Units
Common
Options
Stock
Exercisable
Beneficially
Within 60
Owned
Days (1)
11,868
153,683
20,395
11,950
358
11,950
23,084
40,450
500
686,032
1,990,566
20,320
108,635
14,659
777,216
2,317,234
Name of Beneficial Owner
Willie C. W. Chiang
Greg C. Garland
Al J. Hirshberg
John E. Lowe
Harold W. McGraw III
James J. Mulva
Jeff W. Sheets
Victoria J. Tschinkel (2)
Directors and Executive Officers as a Group (8 Persons)
(1)
Includes beneficial ownership of shares of common stock which may be acquired within 60 days of February 15, 2012, through stock
options awarded under compensation plans.
(2)
Includes 85 shares of common stock owned by the Erica Tschinkel Trust and 6,533 shares of common stock owned jointly with
Ms. Tschinkel’s spouse.
112
Table of Contents
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Separation from ConocoPhillips
The separation will be accomplished by means of the distribution by ConocoPhillips of all of the outstanding shares of Phillips 66 common
stock to holders of ConocoPhillips common stock entitled to such distribution, as described under “The Separation” included elsewhere in this
Information Statement. Completion of the distribution will be subject to satisfaction or waiver by ConocoPhillips of the conditions to the
separation and distribution described under “The Separation—Conditions to the Distribution.”
Related Party Transactions
Our Code of Business Ethics and Conduct to be in effect as of the distribution date will require all directors and executive officers to promptly
bring to the attention of the General Counsel and, in the case of directors, the Lead Director of the Nominating and Governance Committee or,
in the case of executive officers, the Chairman of the Audit and Finance Committee, any transaction or relationship that arises and of which she
or he becomes aware that reasonably could be expected to constitute a related party transaction. For purposes of the company’s Code of
Business Ethics and Conduct, a related party transaction is a transaction in which the company (including its affiliates) is a participant and in
which any director or executive officer (or their immediate family members) had or will have a direct or indirect material interest. Any such
transaction or relationship will be reviewed by our company’s management and the appropriate Board Committee to ensure it does not
constitute a conflict of interest and is reported appropriately. Additionally, the Nominating and Governance Committee charter will provide for
the committee to conduct an annual review of related party transactions between each of our directors and the company (and its subsidiaries)
and to make recommendations to the Board of Directors regarding the continued independence of Board members.
Agreements with ConocoPhillips
As part of our separation from ConocoPhillips, we will enter into a Separation and Distribution Agreement and several other agreements with
ConocoPhillips to effect the separation and provide a framework for our relationships with ConocoPhillips after the separation. These
agreements will provide for the allocation between us and ConocoPhillips of the assets, liabilities and obligations of ConocoPhillips and its
subsidiaries, and will govern the relationships between Phillips 66 and ConocoPhillips subsequent to the separation (including with respect to
transition services, employee matters, intellectual property matters, tax matters and certain other commercial relationships). In addition to the
Separation and Distribution Agreement (which will contain many of the key provisions related to our separation from ConocoPhillips and the
distribution of our shares of common stock to ConocoPhillips stockholders), these agreements include, among others:
•
•
•
•
•
Indemnification and Release Agreement.
Intellectual Property Assignment and License Agreement.
Tax Sharing Agreement.
Employee Matters Agreement.
Transition Services Agreement.
The forms of certain of the principal agreements described below are filed as exhibits to the registration statement on Form 10 of which this
Information Statement is a part. These summaries are qualified in their entirety by reference to the full text of the applicable agreements, which
is incorporated by reference into this Information Statement.
113
Table of Contents
The terms of the agreements described below that will be in effect following the separation have not yet been finalized. Changes, some of
which may be material, may be made prior to our separation from ConocoPhillips. No changes may be made after the separation without our
consent.
Separation and Distribution Agreement
The Separation and Distribution Agreement will govern the terms of the separation of the Downstream business from ConocoPhillips’ other
businesses. Generally, the Separation and Distribution Agreement will include ConocoPhillips’ and our agreements relating to the restructuring
steps to be taken to complete the separation, including the assets and rights to be transferred, liabilities to be assumed, contracts to be assigned
and related matters. Subject to the receipt of required governmental and other consents and approvals, in order to accomplish the separation, the
Separation and Distribution Agreement will provide for ConocoPhillips and us to transfer specified assets and liabilities between the companies
that will operate the Downstream business after the distribution, on the one hand, and ConocoPhillips’ remaining businesses, on the other hand.
The Separation and Distribution Agreement will require ConocoPhillips and us to endeavor to obtain consents, approvals and amendments
required to novate or assign the assets and liabilities that are to be transferred pursuant to the Separation and Distribution Agreement as soon as
reasonably practicable.
Unless otherwise provided in the Separation and Distribution Agreement or any of the related ancillary agreements, all assets will be
transferred on an “as is, where is” basis. Generally, if the transfer of any assets or liabilities requires a consent that will not be obtained before
the distribution, or if any assets or liabilities are transferred to the other party and should not have been so transferred, each party will agree to
hold the assets or liabilities for the intended party’s use and benefit (and at its expense) until they can be transferred to such intended party.
The Separation and Distribution Agreement will specify those conditions that must be satisfied or waived by ConocoPhillips prior to the
distribution. In addition, ConocoPhillips will have the right to determine the date and terms of the distribution, and will have the right, at any
time until completion of the distribution, to determine to abandon or modify the distribution and to terminate the Separation and Distribution
Agreement.
Indemnification and Release Agreement
The Indemnification and Release Agreement will govern the treatment of all aspects relating to indemnification, insurance, litigation
responsibility and management, and litigation document sharing and cooperation. Generally, the Indemnification and Release Agreement will
provide for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and
financial responsibility for the obligations and liabilities of ConocoPhillips’ business with ConocoPhillips. The Indemnification and Release
Agreement will also establish procedures for handling claims subject to indemnification and related matters.
Intellectual Property Assignment and License Agreement
The Intellectual Property Assignment and License Agreement will govern the allocation of intellectual property rights and assets between
Phillips 66 and ConocoPhillips, and provides appropriate cross-licenses to allow each company to operate in its respective business areas
following the separation.
114
Table of Contents
Tax Sharing Agreement
The Tax Sharing Agreement will govern ConocoPhillips’ and our respective rights, responsibilities and obligations with respect to taxes
(including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the distribution and certain
related transactions to qualify as tax-free for federal income tax purposes), tax attributes, tax returns, tax contests and certain other tax matters.
In general, under the Tax Sharing Agreement, we expect that responsibility for taxes for periods prior to the distribution will be allocated in the
following manner:
•
With respect to any U.S. federal income taxes of the affiliated group of which ConocoPhillips is the common parent, we generally
will be responsible for such taxes to the extent attributable to the Downstream business, and ConocoPhillips generally will be
responsible for all other such taxes.
•
With respect to U.S. state or local income taxes, we generally will be responsible for such taxes to the extent attributable to the
Downstream business, and ConocoPhillips generally will be responsible for all other such taxes.
•
ConocoPhillips generally will be responsible for any foreign income taxes reportable on returns that include only ConocoPhillips
and its subsidiaries (excluding us and our subsidiaries), and we generally will be responsible for any foreign income taxes
reportable on returns that include only us or our subsidiaries.
•
With respect to any U.S. state or local or foreign property taxes, we generally will be responsible for such taxes to the extent
attributable to property owned by us or one of our subsidiaries immediately following the distribution, and ConocoPhillips
generally will be responsible for all other such taxes.
•
With respect to certain non-income taxes, such as motor fuel, excise, sales and use taxes, we generally will be responsible for
such taxes to the extent attributable to the Downstream business, and ConocoPhillips generally will be responsible for all other
such taxes.
In addition, the Tax Sharing Agreement will impose certain restrictions on us and our subsidiaries (including restrictions on share issuances,
business combinations, sales of assets and similar transactions) that are designed to preserve the tax-free status of the distribution and certain
related transactions. The Tax Sharing Agreement will provide special rules allocating tax liabilities in the event the distribution, together with
certain related transactions, is not tax-free. In general, under the Tax Sharing Agreement, we will be responsible for any taxes imposed on
ConocoPhillips that arise from the failure of the distribution and certain related transactions to qualify as a tax-free transaction for federal
income tax purposes within the meaning of Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Code to the extent that
the failure to qualify is attributable to actions, events, or transactions relating to our stock, assets or business, or a breach of the relevant
representations or covenants made by us in the Tax Sharing Agreement.
The Tax Sharing Agreement will also set forth ConocoPhillips’ and our obligations as to the filing of tax returns, the administration of tax
contests and assistance and cooperation on tax matters.
115
Table of Contents
Employee Matters Agreement
The Employee Matters Agreement will govern ConocoPhillips’ and our compensation and employee benefit obligations with respect to the
current and former employees and non-employee directors of each company, and generally will allocate liabilities and responsibilities relating
to employee compensation and benefit plans and programs. The Employee Matters Agreement will provide for the treatment of outstanding
ConocoPhillips equity awards and certain other outstanding annual and long-term incentive awards. The Employee Matters Agreement will
provide that, following the distribution, our active employees generally will no longer participate in benefit plans sponsored or maintained by
ConocoPhillips and will commence participation in our benefit plans, which are expected to be similar to the existing ConocoPhillips benefit
plans. In addition, the Employee Matters Agreement will provide that each of the parties will be responsible for their respective current
employees and compensation plans for such current employees and that ConocoPhillips will be responsible for all liabilities relating to former
employees. The Employee Matters Agreement also will set forth the general principles relating to employee matters, including with respect to
the assignment of employees, the assumption and retention of liabilities and related assets, expense reimbursements, workers’ compensation,
leaves of absence, the provision of comparable benefits, employee service credit, the sharing of employee information, and the duplication or
acceleration of benefits. The Employee Matters Agreement will also address any special circumstances, including employees who will transfer
to their eventual permanent employer on a delayed basis because they will continue to provide services to either ConocoPhillips or Phillips 66
during a transition period following the distribution.
The Employee Matters Agreement will also provide that (i) the distribution does not constitute a change in control under ConocoPhillips’
plans, programs, agreements or arrangements, and (ii) the distribution and the assignment, transfer or continuation of the employment of
employees with another entity will not constitute a severance event under the applicable plans, programs, agreements or arrangements.
Transition Services Agreement
The Transition Services Agreement will set forth the terms on which ConocoPhillips will provide to us, and we will provide to ConocoPhillips,
on a temporary basis, certain services or functions that the companies historically have shared. Transition services may include administrative,
payroll, human resources, data processing, environmental health and safety, financial audit support, financial transaction support, and other
support services, information technology systems and various other corporate services. We expect the agreement will provide for the provision
of specified transition services, generally for a period of up to 12 months, with a possible extension of 6 months (an aggregate of 18 months),
on a cost or a cost-plus basis.
116
Table of Contents
DESCRIPTION OF CAPITAL STOCK
General
The following is a summary of information concerning our capital stock. The summaries and descriptions below do not purport to be complete
statements of the relevant provisions of our Certificate of Incorporation or of our By-laws to be in effect at the time of the distribution. The
summary is qualified in its entirety by reference to these documents, which you must read for complete information on our capital stock as of
the time of the distribution. Our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws to be in effect at the
time of the distribution are included as exhibits to our registration statement on Form 10, of which this Information Statement forms a part.
Distributions of Securities
In the past three years, Phillips 66 has not sold any securities, including sales of reacquired securities, new issues (other than to ConocoPhillips
in connection with our formation), securities issued in exchange for property, services or other securities, and new securities resulting from the
modification of outstanding securities.
Common Stock
Immediately following the distribution, our authorized common stock will consist of 2.5 billion shares of common stock, par value $0.01 per
share.
Shares Outstanding— Immediately following the distribution, we expect that approximately 640 million shares of our common stock will be
issued and outstanding based upon approximately 1,280 million shares of ConocoPhillips common stock outstanding as of January 31, 2012,
and assuming no exercise of ConocoPhillips options or SARs or settlement of ConocoPhillips RSUs or PSUs in shares of ConocoPhillips
common stock, and applying the distribution ratio of one share of our common stock for every two shares of ConocoPhillips common stock
held as of the record date.
Voting Rights— Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Board members are
elected by a majority of the votes cast in person or by proxy and entitled to vote, including votes to withhold authority and excluding
abstentions.
Holders of shares of our common stock do not have cumulative voting rights. In other words, a holder of a single share of common stock
cannot cast more than one vote for each position to be filled on our Board of Directors. A consequence of not having cumulative voting rights
is that the holders of a majority of the shares of common stock entitled to vote in the election of directors can elect all directors standing for
election, which means that the holders of the remaining shares will not be able to elect any directors.
Other Rights— In the event of any liquidation, dissolution or winding up of the company, after the satisfaction in full of the liquidation
preferences of holders of any preferred shares, holders of shares of our common stock are entitled to ratable distribution of the remaining assets
available for distribution to stockholders. The shares of our common stock are not subject to redemption by operation of a sinking fund or
otherwise. Holders of shares of our common stock are not entitled to preemptive rights.
Fully Paid— The issued and outstanding shares of our common stock are fully paid and non-assessable. This means the full purchase price for
the outstanding shares of our common stock has been paid and the holders of such shares will not be assessed any additional amounts for such
shares. Any additional shares of common stock that we may issue in the future will also be fully paid and non-assessable.
117
Table of Contents
Preferred Stock
We are authorized to issue up to 500 million shares of preferred stock, par value $0.01 per share. Our Board of Directors, without further action
by the holders of our common stock, may issue shares of our preferred stock. Our Board of Directors is vested with the authority to fix by
resolution the designations, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or
restrictions thereof, including, without limitation, redemption rights, dividend rights, liquidation preferences and conversion or exchange rights
of any class or series of preferred stock, and to fix the number of classes or series of preferred stock, the number of shares constituting any such
class or series and the voting powers for each class or series.
The authority of the Board of Directors to issue preferred stock could potentially be used to discourage attempts by third-parties to obtain
control of our company through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly. Our
Board of Directors may issue preferred stock with voting rights or conversion rights that, if exercised, could adversely affect the voting power
of the holders of common stock. No current agreements or understandings exist with respect to the issuance of preferred stock, and our Board
of Directors has no present intention to issue any shares of preferred stock.
Restrictions on Payment of Dividends
We are incorporated in Delaware and are governed by Delaware law. Holders of shares of our common stock are entitled to receive dividends,
subject to prior dividend rights of the holders of any preferred shares, when, as and if declared by our Board of Directors out of funds legally
available for that purpose. After the separation, we intend to pay a cash dividend at an initial rate of $0.20 per share per quarter, or $0.80 per
share per year. However, the declaration and amount of all dividends to holders of our common stock will be at the discretion of our Board of
Directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our business, covenants
associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors that the Board deems
relevant.
Size of Board and Vacancies; Removal
Upon completion of the separation and distribution, we expect that seven to ten individuals will serve on our Board of Directors. Our
Certificate of Incorporation will provide that our directors will be divided into three classes, as nearly equal in number as possible, with the
members of each class serving staggered three-year terms. Class I directors will have an initial term expiring in 2013, Class II directors will
have an initial term expiring in 2014 and Class III directors will have an initial term expiring in 2015. At each annual meeting of stockholders,
directors will be elected to succeed the class of directors whose terms have expired. This classification of our Board of Directors could have the
effect of increasing the length of time necessary to change the composition of a majority of the Board of Directors; in general, at least two
annual meetings of stockholders will be necessary for stockholders to effect a change in a majority of the members of the Board of Directors.
Our Certificate of Incorporation and By-laws will provide, subject to the rights of holders of a series of shares of preferred stock to elect one or
more directors pursuant to any provisions of any certificate of designation relating to any such series, that the number of directors will be fixed
exclusively by a majority of the entire Board of Directors from time to time. Our By-laws will provide that directors may be removed, only for
cause, by the affirmative vote of the holders of at least a majority of the voting power of the corporation entitled to vote generally for the
election of directors, voting together as a single class. Our By-laws will provide that, unless the Board of Directors determines otherwise,
vacancies, however created, may be filled only by a majority of the remaining directors, even if less than a quorum.
118
Table of Contents
Stockholder Action by Written Consent
Our Certificate of Incorporation and By-laws will provide that our stockholders may act only at an annual or special meeting of stockholders
and may not act by written consent.
Stockholder Meetings
Our Certificate of Incorporation and By-laws will provide that only a majority of our entire Board of Directors or the chairman of our Board of
Directors may call a special meeting of our stockholders.
Requirements for Advance Notice of Stockholder Nominations and Proposals
Our By-laws will contain advance-notice and other procedural requirements that apply to stockholder nominations of persons for election to
our Board of Directors at any annual meeting of stockholders and to stockholder proposals that stockholders take any other action at any annual
meeting. In the case of any annual meeting, a stockholder proposing to nominate a person for election to our Board of Directors or proposing
that any other action be taken must give our corporate secretary written notice of the proposal not less than 90 days and not more than 120 days
before the first anniversary of the date of the immediately preceding year’s annual meeting of stockholders. These stockholder proposal
deadlines are subject to exceptions if the annual meeting date is more than 30 days before or after such anniversary date, in which case notice
by such stockholder, to be timely, must be so delivered not earlier than the close of business on the 120 th day prior to the date of such annual
meeting and not later than the close of business on the later of the 90 th day prior to the date of such annual meeting or, if the first public
announcement of the date of such annual meeting is less than 100 days prior to the date of such meeting, the tenth day following the day on
which we first make a public announcement of the date of the annual meeting. If the chairman of our Board of Directors or a majority of our
Board of Directors calls a special meeting of stockholders for the election of directors, a stockholder proposing to nominate a person for that
election must give our corporate secretary written notice of the proposal not earlier than the close of business on the 120 th day prior to the date
of such special meeting and not later than close of business on the later of the 90 th day prior to the date of such special meeting or, if the first
public announcement of the date of the special meeting is less than 100 days prior to the date of such meeting, the tenth day following the day
on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors. Our
By-laws will prescribe specific information that any such stockholder notice must contain.
These advance-notice provisions may have the effect of precluding a contest for the election of our directors or the consideration of stockholder
proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to
elect its own slate of directors or to approve its own proposal, without regard to whether consideration of those nominees or proposals might be
harmful or beneficial to us and our stockholders.
Amendment of By-laws
Our Certificate of Incorporation will provide that our stockholders may, with the approval of greater than a majority of the voting power
entitled to vote generally in the election of directors, adopt, amend and repeal our By-laws at any regular or special meeting of stockholders,
provided the notice of intention to adopt, amend or repeal the By-laws has been included in the notice of that meeting, although the approval of
greater than 80 percent of the voting power entitled to vote generally in the election of directors will be required to amend certain By-laws and
related provisions of our Certificate of Incorporation. Our Certificate of Incorporation will also confer on our Board of Directors the power to
adopt, amend or repeal our By-laws.
119
Table of Contents
Exclusive Forum
Our Certificate of Incorporation will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any
derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors or
officers to us or our stockholders, creditors or other constituents, any action asserting a claim against us or any of our directors or officers
arising pursuant to any provision of the Delaware General Corporation Law or our Certificate of Incorporation or By-laws (as either may be
amended from time to time) or any action asserting a claim against us or any of our directors or officers governed by the internal affairs
doctrine; provided, that, if (and only if) the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter
jurisdiction, such action may be brought in another court sitting in the State of Delaware.
Delaware Statutory Business Combination Provision
As a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law (DGCL). In general, Section 203 prevents
an “interested stockholder,” which is defined generally as a person owning 15 percent or more of a Delaware corporation’s outstanding voting
stock or any affiliate or associate of that person, from engaging in a broad range of “business combinations” with the corporation for three
years following the date on which that person became an interested stockholder unless:
•
Before that person became an interested stockholder, the board of directors of the corporation approved the transaction in which that
person became an interested stockholder or approved the business combination;
•
On completion of the transaction that resulted in that person’s becoming an interested stockholder, that person owned at least 85
percent of the voting stock of the corporation outstanding at the time the transaction commenced, other than stock held by
(1) directors who are also officers of the corporation or (2) any employee stock plan that does not provide employees with the right
to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
•
Following the transaction in which that person became an interested stockholder, both the board of directors of the corporation and
the holders of at least two-thirds of the outstanding voting stock of the corporation not owned by that person approve the business
combination.
Under Section 203, the restrictions described above also do not apply to specific business combinations proposed by an interested stockholder
following the announcement or notification of designated extraordinary transactions involving the corporation and a person who had not been
an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the
corporation’s directors, if a majority of the directors who were directors prior to any person’s becoming an interested stockholder during the
previous three years, or were recommended for election or elected to succeed those directors by a majority of those directors, approve or do not
oppose that extraordinary transaction.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be Computershare Shareowner Services LLC.
NYSE Listing
Subject to the consummation of the separation, our shares of common stock have been authorized for listing on the NYSE under the ticker
symbol “PSX.”
120
Table of Contents
Limitation on Liability of Directors and Indemnification of Directors and Officers
Section 145 of the DGCL provides that a corporation may indemnify directors and officers as well as other employees and individuals against
expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or investigative, in which such person is made a party by reason of the fact
that the person is or was a director, officer, employee or agent of the corporation (other than an action by or in the right of the corporation—a
“derivative action”), if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct
was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses (including
attorneys’ fees) incurred in connection with the defense or settlement of such action, and the statute requires court approval before there can be
any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation’s By-laws, disinterested director vote, stockholder vote, agreement or
otherwise.
Our Certificate of Incorporation will provide that no director will be liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from liability or limitation on liability is not permitted under the DGCL, as
now in effect or as amended. Currently, Section 102(b)(7) of the DGCL requires that liability be imposed for the following:
•
•
•
•
Any breach of the director’s duty of loyalty to our company or our stockholders.
Any act or omission not in good faith or which involved intentional misconduct or a knowing violation of law.
Unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL.
Any transaction from which the director derived an improper personal benefit.
Our Certificate of Incorporation and By-laws will provide that, to the fullest extent authorized or permitted by the DGCL, as now in effect or as
amended, we will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that such person, or a person of whom he or she is the legal representative, is or was our director
or officer, or by reason of the fact that our director or officer is or was serving, at our request, as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans
maintained or sponsored by us. We will indemnify such persons against expenses (including attorneys’ fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with such action if such person acted in good faith and in a manner
reasonably believed to be in our best interests and, with respect to any criminal proceeding, had no reason to believe their conduct was
unlawful. A similar standard will be applicable in the case of derivative actions, except that indemnification will only extend to expenses
(including attorneys’ fees) incurred in connection with the defense or settlement of such actions, and court approval will be required before
there can be any indemnification where the person seeking indemnification has been found liable to us. Any amendment of this provision will
not reduce our indemnification obligations relating to actions taken before an amendment.
We intend to obtain insurance policies that insure our directors and officers and those of our subsidiaries against certain liabilities they may
incur in their capacity as directors and officers. The insurance will provide coverage, subject to its terms and conditions, if the company is
unable to (e.g., due to bankruptcy) or unwilling to indemnify the directors and officers for a covered wrongful act.
121
Table of Contents
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form 10 with the SEC with respect to the shares of our common stock that ConocoPhillips
stockholders will receive in the distribution. This Information Statement is a part of that registration statement and, as allowed by SEC rules,
does not include all of the information you can find in the registration statement or the exhibits to the registration statement. For additional
information relating to our company and the distribution, reference is made to the registration statement and the exhibits to the registration
statement. Statements contained in this Information Statement as to the contents of any contract or document referred to are not necessarily
complete and in each instance, if the contract or document is filed as an exhibit to the registration statement, we refer you to the copy of the
contract or other document filed as an exhibit to the registration statement. Each such statement is qualified in all respects by reference to the
applicable document.
Following the distribution, we will file annual, quarterly and special reports, proxy statements and other information with the SEC. We intend
to furnish our stockholders with annual reports containing consolidated financial statements audited by an independent registered public
accounting firm. The registration statement is, and any of these future filings with the SEC will be, available to the public over the Internet on
the SEC’s website at http://www.sec.gov. You may read and copy any filed document at the SEC’s public reference rooms in Washington,
D.C. at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference
rooms.
We maintain an Internet website at http://www.Phillips66.com. Our website and the information contained on that site, or connected to that
site, are not incorporated into this Information Statement or the registration statement on Form 10.
122
Table of Contents
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements presented below have been derived from our historical combined financial
statements included in this Information Statement. While the historical combined financial statements reflect the past financial results of
ConocoPhillips’ Downstream business, these pro forma statements give effect to the separation of that business into an independent, publicly
traded company. The pro forma adjustments to reflect the separation include:
•
•
•
•
The distribution of our common stock to ConocoPhillips stockholders.
The issuance of $7.8 billion of new debt.
The cash distribution of approximately $5.8 billion to ConocoPhillips.
The transfer of assets and liabilities, primarily related to postretirement benefit plans, buildings, and land, which were not included
in the historical combined statements.
The pro forma adjustments are based on available information and assumptions management believes are reasonable; however, such
adjustments are subject to change as the costs of operating as a stand-alone company are determined. In addition, such adjustments are
estimates and may not prove to be accurate. The unaudited pro forma condensed combined financial statements do not reflect all of the costs of
operating as a stand-alone company, including possible higher information technology, tax, accounting, treasury, legal, investor relations,
insurance and other similar expenses associated with operating as a stand-alone company. Only costs that management has determined to be
factually supportable and recurring are included as pro forma adjustments, including the items described above. Incremental costs and expenses
associated with operating as a stand-alone company, which are not reflected in the accompanying pro forma condensed combined financial
statements, are estimated to be approximately $150 million before-tax annually.
Subject to the terms of the Separation and Distribution Agreement, ConocoPhillips will generally pay all nonrecurring third-party costs and
expenses related to the separation and incurred prior to the separation date. Such nonrecurring amounts are expected to include costs to separate
and/or duplicate information technology systems, investment banker fees, outside legal and accounting fees, and similar costs. After the
separation, subject to the terms of the Separation and Distribution Agreement, all costs and expenses related to the separation incurred by either
ConocoPhillips or us will be borne by the party incurring the costs and expenses. Nonrecurring costs associated with the separation, which we
expect to be included in our income within one year after the separation, are estimated to be approximately $50 million before-tax.
The unaudited pro forma condensed combined statement of income for the year ended December 31, 2011, has been prepared as though the
separation occurred on January 1, 2011. The unaudited pro forma condensed combined balance sheet at December 31, 2011, has been prepared
as though the separation occurred on December 31, 2011. The unaudited pro forma condensed combined financial statements are for illustrative
purposes only, and do not reflect what our financial position and results of operations would have been had the separation occurred on the dates
indicated and are not necessarily indicative of our future financial position and future results of operations.
Our retained cash balance and the amount of the cash distribution to ConocoPhillips are subject to working capital adjustments. The following
pro forma statements do not reflect any impact of such working capital adjustments, as the amount of the adjustment at the separation date is
not currently determinable and would represent a financial projection. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Working Capital” included elsewhere in this Information Statement.
The unaudited pro forma condensed combined financial statements should be read in conjunction with our historical combined financial
statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Information
Statement. The unaudited pro forma
123
Table of Contents
condensed combined financial statements constitute forward-looking information and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated. See “Cautionary Statement Regarding Forward-Looking Statements” included
elsewhere in this Information Statement.
124
Table of Contents
Unaudited Pro Forma Condensed Combined Statement of Income
Year Ended December 31, 2011
Phillips 66
Millions of Dollars
As
Reported
Pro Forma
Adjustments
Pro
Forma
196,088
2,843
1,638
45
-
196,088
2,843
1,638
45
Total Revenues and Other Income
200,614
-
200,614
Costs and Expenses
Purchased crude oil and products*
Operating expenses
Selling, general and administrative expenses
Depreciation and amortization
Impairments
Taxes other than income taxes
Accretion on discounted liabilities
Interest and debt expense
Foreign currency transaction (gains) losses
172,837
4,072
1,409
908
472
14,288
21
17
(34 )
12 (a)
290 (b)
-
172,837
4,072
1,409
920
472
14,288
21
307
(34 )
193,990
302
194,292
Revenues and Other Income
Sales and other operating revenues*
Equity in earnings of affiliates
Net gain on dispositions
Other income
$
Total Costs and Expenses
Income before income taxes
Provision for income taxes
6,624
1,844
(302 )
(116 )(c)
6,322
1,728
Net income
Less: net income attributable to noncontrolling interests
4,780
(5 )
(186 )
-
4,594
(5 )
4,775
(186 )
4,589
Net Income Attributable to Phillips 66
$
Net Income Attributable to Phillips 66 Per Share of
Common Stock (dollars)
Basic
Diluted
$6.67 (d)
6.62 (d)
Average Common Shares Outstanding (in thousands)
Basic
Diluted
687,518 (d)
693,550 (d)
*After the separation, ConocoPhillips will be considered a third-party, and transactions with ConocoPhillips will no longer be classified as related party transactions. See Note 20—Related
Party Transactions, in the Combined Financial Statements, for the amount of revenue and purchases with ConocoPhillips for the year ended December 31, 2011, considered third-party in the
“Pro Forma” column and related party in the “As Reported” column.
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
125
Table of Contents
Unaudited Pro Forma Condensed Combined Balance Sheet
At December 31, 2011
Phillips 66
Millions of Dollars
As
Reported
Assets
Cash and cash equivalents
Accounts and notes receivable
Accounts and notes receivable—related parties
Inventories
Prepaid expenses and other current assets
$
Pro Forma
Adjustments
Pro
Forma
8,354
1,671
3,466
457
2,000 (e)
63 (c)
2,000
8,354
1,671
3,466
520
13,948
10,306
1
14,771
3,332
732
121
2,063
33 (g)
282 (a)
61 (f)
16,011
10,339
1
15,053
3,332
732
182
$
43,211
2,439
45,650
$
10,007
785
30
1,087
64
411
568 (f)
(43 )(c)
324 (g)
-
10,007
785
598
1,044
388
411
Total Current Liabilities
Long-term debt
Asset retirement obligations and accrued environmental
costs
Deferred income taxes
Employee benefit obligations
Other liabilities and deferred credits
12,384
361
849
7,048 (f)
13,233
7,409
787
5,803
117
466
(839 )(c)
1,335 (g)
-
787
4,964
1,452
466
Total Liabilities
19,918
Net Investment/Stockholders’ Equity
Common stock
Capital in excess of par
Accumulated other comprehensive income (loss)
Net parent company investment
122
23,142
Total
Noncontrolling interests
23,264
29
(5,954 )
-
17,310
29
Total Net Investment/Stockholders’ Equity
23,293
(5,954 )
17,339
43,211
2,439
45,650
Total Current Assets
Investments and long-term receivables
Loans and advances—related parties
Net properties, plants and equipment
Goodwill
Intangibles
Other assets
Total Assets
Liabilities
Accounts payable
Accounts payable—related parties
Short-term debt
Accrued income and other taxes
Employee benefit obligations
Other accruals
Total Liabilities and Net Investment/Stockholders’ Equity
$
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
126
8,393
6 (h)
17,807 (i)
(625 )(c)(g)(j)
(23,142 )(i)
28,311
6
17,807
(503)
-
Table of Contents
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Phillips 66
(a)
Represents the assets that will be transferred to, and held by, us after the separation, primarily consisting of buildings (and related
depreciation) and land.
(b)
Represents adjustments to interest resulting from the assumed incurrence of $7.8 billion of new indebtedness in connection with the
separation, as follows:
Millions
of Dollars
Interest expense on $7.8 billion of newly incurred indebtedness
Loan fees and amortization of debt issuance costs
$
Total pro forma adjustment to interest expense
267
23
$
290
Pro forma interest expense was calculated based on an assumed blended rate of 3.4 percent before debt issuance costs and fees. The
interest rates reflect an investment grade rating with an appropriate spread over the relevant benchmark rate. Interest expense also
includes amortization of debt issuance costs and liquidity facility fees (see Note (f)). Debt issuance costs and initial liquidity facility fees
are amortized over the terms of the associated debt and credit facility. Certain additional liquidity facility fees are expensed as
incurred. Actual interest expense may be higher or lower depending on fluctuations in interest rates. A one-eighth percent change in
interest rates would result in a $10 million change in annual interest expense.
(c)
Represents the tax effect of pro forma adjustments to income before income taxes using a blended statutory tax rate of 38.25 percent for
the year ended December 31, 2011. The effective tax rate of Phillips 66 could be different (either higher or lower) depending on activities
subsequent to the separation.
Also represents a net reduction of deferred income tax liability resulting from the following:
Millions
of Dollars
Reinvestment plans related to international operations*
Pension plans and other employee benefit arrangements (see Note (g))
Adjustment to reflect actual net operating loss and credit carryforwards
Assets that will be transferred in (see Note (a))
Reclass of currency translation adjustments (see Note (j))*
$
(547)
(535)
141
20
(24)
Net reduction of deferred income tax liability
$
(945)
*
(d)
Includes effects of a combined $29 million increase in Accumulated other comprehensive income (loss).
The calculations of pro forma basic earnings per share and average shares outstanding for the period presented are based on the number
of shares used to calculate ConocoPhillips common stock outstanding for the year ended December 31, 2011, adjusted for the
distribution ratio of one share of our common stock for every two shares of ConocoPhillips common stock outstanding.
127
Table of Contents
The calculations of pro forma diluted earnings per share and average shares outstanding for the period presented are based on the number
of shares used to calculate ConocoPhillips diluted earnings per share for the year ended December 31, 2011, adjusted for the same
distribution ratio. This calculation may not be indicative of the dilutive effect that will actually result from Phillips 66 stock-based awards
issued in connection with the adjustment of outstanding ConocoPhillips stock-based awards or the grant of new stock-based awards. The
number of dilutive shares of our common stock underlying Phillips 66 stock-based awards issued in connection with the adjustment of
outstanding ConocoPhillips stock-based awards will not be determined until after the distribution date.
(e)
Represents adjustments to cash and cash equivalents, as follows:
Millions
of Dollars
Cash received from incurrence of new debt
Cash paid to ConocoPhillips
$
7,800
(5,800)
Cash pro forma adjustment
$
2,000
(f)
Asset adjustments represent deferred costs and expenses related to obtaining new debt and liquidity facilities. Short-term and long-term
debt adjustments represent the incurrence of new debt, net of existing debt retirements prior to the separation. New debt is expected to
consist of a $2,000 million three-year amortizing term loan and $5,800 million of fixed-rate notes spread across a range of maturities
from three to 30 years.
(g)
Represents the assets and liabilities associated with ConocoPhillips-sponsored pension plans and other employee benefit arrangements
for the known Phillips 66 employees located in the United States and the United Kingdom. The actual amount of pension and employee
benefit assets and liabilities will be different (either higher or lower) depending on the final selection of employees.
(h)
Represents the distribution of approximately 643 million shares of our common stock at a par value of $0.01 per share to holders of
ConocoPhillips common stock (see Note (d)).
(i)
Represents the elimination of the net investment by ConocoPhillips and adjustments to capital in excess of par resulting from the
following:
Millions
of Dollars
Reclassification of ConocoPhillips’ net investment
Distribution to ConocoPhillips (see Note (e))
New assets and liabilities recorded on our books (see Notes (a), (c), (f), (g) and (j))
$
Total net investment/stockholders’ equity
Common stock ($0.01 par value) (see Note (h))
17,813
(6)
Total capital in excess of par
(j)
23,142
(5,800)
471
$
17,807
Represents the reclassification of $73 million of currency translation adjustments to “Capital in excess of par” from “Accumulated other
comprehensive income (loss)” associated with corporate legal entities that will be transferred to, and held by us, after the separation.
128
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management’s Discussion and Analysis is the company’s analysis of its financial performance and of significant trends that may affect future
performance. It should be read in conjunction with the combined financial statements and notes included in this Information Statement. It
contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives,
expectations and intentions. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,”
“potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,”
“effort,” “target” and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct
any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such
forward-looking statements should be read in conjunction with the company’s disclosures under “Cautionary Statement Regarding
Forward-Looking Statements,” beginning on page 32.
The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66.
EXECUTIVE OVERVIEW
The Separation
On July 14, 2011, ConocoPhillips announced approval by its Board of Directors to pursue the separation of its upstream and downstream
businesses into two stand-alone, publicly traded corporations. This separation is expected to be completed in accordance with a Separation and
Distribution Agreement between ConocoPhillips and Phillips 66. On the basis the distribution, together with certain related transactions,
qualifies as a reorganization for U.S. federal income tax purposes, in general, we expect, for U.S. federal income tax purposes, (i) the
distribution will not result in any taxable income, gain or loss to ConocoPhillips, except for taxable income or gain possibly arising as a result
of certain intercompany transactions; and (ii) no gain or loss will be recognized by U.S. holders of ConocoPhillips common stock, and no
amount will be included in their income, upon their receipt of shares of Phillips 66 common stock in the distribution, except with respect to any
cash received in lieu of fractional shares. ConocoPhillips intends to distribute, on a pro rata basis, all of the shares of Phillips 66 common stock
to ConocoPhillips stockholders as of the record date for the distribution. Upon completion of the separation, ConocoPhillips and Phillips 66
will each be independent, publicly traded companies and will have separate public ownership, boards of directors and management. For
additional information, see “The Separation” included elsewhere in this Information Statement.
Basis of Presentation
The combined financial statements included in this Information Statement were prepared in connection with the separation and reflect the
combined historical results of operations, financial position and cash flows of ConocoPhillips’ refining, marketing and transportation
operations, its natural gas gathering, processing, transmission and marketing operations (primarily conducted through its equity investment in
DCP Midstream, LLC, its petrochemical operations (conducted through its equity investment in Chevron Phillips Chemical Company LLC
(CPChem)), its power generation operations, and an allocable portion of corporate costs. Although the legal transfer of these downstream
businesses of ConocoPhillips into Phillips 66 has yet to take place, for ease of reference, these combined financial statements are collectively
referred to as those of Phillips 66.
129
Table of Contents
The combined financial statements are presented as if such businesses had been combined for all periods presented. All intercompany
transactions and accounts within Phillips 66 have been eliminated. The assets and liabilities in the combined financial statements have been
reflected on a historical cost basis, as immediately prior to the separation all of the assets and liabilities presented are wholly owned by
ConocoPhillips and are being transferred within the ConocoPhillips consolidated group. The combined statements of income also include
expense allocations for certain corporate functions historically performed by ConocoPhillips and not allocated to its operating segments,
including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information
technology. These allocations are based primarily on specific identification of time and/or activities associated with Phillips 66, employee
headcount or capital expenditures. Our management believes the assumptions underlying the combined financial statements, including the
assumptions regarding allocating general corporate expenses from ConocoPhillips, are reasonable. Nevertheless, the combined financial
statements may not include all of the actual expenses that would have been incurred had we operated as a stand-alone company during the
periods presented and may not reflect our combined results of operations, financial position and cash flows had we operated as a stand-alone
company during the periods presented. Actual costs that would have been incurred if we had operated as a stand-alone company would depend
on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and
infrastructure.
Business Environment
The past several years have reflected the volatile nature of our business environment. Through the first half of 2008, forecasts of worldwide
economic growth and concerns over limited global refining capacities led to robust refining margins. Our chemicals business also experienced
favorable returns during this time, and natural gas liquids prices, a key metric for the midstream business, reached into the mid-to-upper
$60-per-barrel range. This was followed by an abrupt shift into a severe global financial recession, which reduced demand for petroleum,
chemical and plastics products and significantly weakened refining margins and chemical returns. Natural gas liquids prices also fell sharply
into the upper $20-per-barrel range, significantly impacting midstream earnings.
During 2009, demand, particularly for distillates, continued to be suppressed by the global economic slowdown. In addition, the compressed
differentials in prices for high-quality crude oil, compared with those of lower-quality crude oil, reduced margins for those refineries
configured to process lower-quality crudes. Returns in the chemicals business remained challenged in 2009 during the recession, while natural
gas liquids prices steadily increased throughout the year, generally tracking the improvement in crude oil prices.
Global refining margins improved during 2010, as global demand for refined products improved, driven by an improved economic
environment, particularly in developing nations. In addition, differentials between high-quality and low-quality crude oil improved. During
2011, domestic refining margins continued to strengthen, as increased crude oil supplies in the Midcontinent area, due to increased oil
production from shale plays, caused West Texas Intermediate (WTI) grade crude oil to trade at a deeper discount to waterborne crudes.
Refineries capable of processing WTI and crude oils that are WTI-based benefited from these lower regional feedstock prices. This discount
began to narrow toward the end of 2011. In contrast, East Coast refining, which relies primarily on waterborne Brent-based crudes, continued
to be under market pressure during the year. The chemicals industry also experienced robust margin improvement in 2010 and 2011, following
the improved economic environment. The midstream sector benefited from rising natural gas liquids prices throughout 2010 and 2011.
130
Table of Contents
Segments
Our business is organized into three operating segments:
Refining and Marketing (R&M)
The R&M segment purchases and transports crude oil and other feedstocks and refines these into petroleum products (such as gasoline,
distillates and aviation fuels). We then market and distribute the refined petroleum products, mainly in the United States, Europe and Asia. We
sell our U.S. refined products to wholesale marketing customers, while internationally we sell through both wholesale and retail outlets. In
addition, this segment includes our power generation activities.
Results for our R&M segment depend largely on refining and marketing margins, cost control, and refinery throughput. R&M earnings for the
years 2011, 2010 and 2009 were $3,848 million, $146 million and $71 million, respectively. See “Business Environment” above for a
discussion of market factors impacting this segment’s results over the three-year period ended December 31, 2011.
Midstream
The Midstream segment primarily consists of our 50 percent equity investment in DCP Midstream, as well as other operations. The Midstream
segment gathers, processes, transports and markets natural gas, and fractionates and markets natural gas liquids, primarily in the United States.
The Midstream segment’s results are most closely linked to natural gas liquids prices and, to a lesser extent, natural gas prices. Midstream
earnings for the years 2011, 2010 and 2009 were $403 million, $262 million and $317 million, respectively. These results primarily reflect the
interaction of natural gas liquids prices with those of crude oil.
Chemicals
The Chemicals segment consists of our 50 percent equity investment in CPChem. CPChem manufactures and markets petrochemicals and
plastics on a worldwide basis. The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products
are based on market factors over which CPChem has little or no control. Chemicals earnings for the years 2011, 2010 and 2009 were $716
million, $486 million and $228 million, respectively. These results primarily reflect the movement of olefins and polyolefins margins in
response to market factors driven by the global economy.
Liquidity
Our capital expenditures for the three-year period ended December 31, 2011, averaged $1.5 billion per year. Capital expenditures during this
period were primarily for the R&M segment, and were for air emission reduction and clean fuel projects to meet new environmental standards,
refinery upgrade projects to improve product yields and increase heavy crude oil processing capacity, improvements to the operating integrity
of key processing units, and safety-related projects. Our CPChem and DCP Midstream joint ventures have been self-funded over the past three
years, and thus their capital expenditure requirements are not included in our historical combined capital expenditure amounts.
Based on our expected capital structure and a comparison with peers in our industry, we have received an investment grade credit rating from
Standard & Poor’s Ratings Services and Moody’s Investors Service. We anticipate ensuring adequate liquidity for day-to-day operations and
contingencies with initial cash and cash equivalents of $2.0 billion (subject to working capital adjustments), as well as liquidity facilities of
approximately $5.2 billion, to include a revolving credit facility and a trade receivables securitization facility. Also, we may pursue other credit
arrangements, such as bilateral letters of credit. We expect to have outstanding debt of approximately $8.0 billion upon separation and plan to
file a universal shelf registration statement with the U.S. Securities and Exchange Commission.
131
Table of Contents
RESULTS OF OPERATIONS
Combined Results
A summary of the company’s earnings by business segment follows:
Millions of Dollars
Year Ended December 31
2010
2011
R&M
Midstream
Chemicals
Corporate and Other
2009
$ 3,848
403
716
(192 )
146
262
486
(159 )
71
317
228
(140 )
$ 4,775
735
476
2011 vs. 2010
The improved results in 2011 were primarily the result of:
•
•
•
•
•
Improved results from our R&M operations, reflecting significantly higher domestic refining margins.
Higher gains from asset sales. 2011 gains from asset dispositions were $1,546 million after-tax, compared with 2010 gains of $118
million after-tax.
Lower property impairments. 2010 earnings included the $1,174 million after-tax impairment of our Wilhelmshaven Refinery
(WRG) in Germany, which was partly offset by the $303 million after-tax impairment and warehouse inventory write-down
associated with our Trainer Refinery in 2011.
Increased earnings in the Chemicals segment, primarily due to higher margins and volumes in the olefins and polyolefins business
line.
Improved earnings from the Midstream segment, mainly due to higher natural gas liquids prices.
2010 vs. 2009
The improved results in 2010 were primarily the result of:
•
•
•
Significantly higher global refining margins in our R&M segment.
Increased earnings in the Chemicals segment, which had considerably higher margins in the olefins and polyolefins business line.
Gains on asset dispositions, which primarily consisted of the sale of our 50 percent interest in CFJ Properties for a $113 million
after-tax gain.
These items were partially offset by property impairments, which primarily consisted of the WRG impairment in 2010.
Income Statement Analysis
2011 vs. 2010
Sales and other operating revenues increased 34 percent in 2011, while purchased crude oil and products increased 38 percent. These increases
were primarily due to higher prices for petroleum products, crude oil and natural gas liquids.
132
Table of Contents
Equity in earnings of affiliates increased 61 percent in 2011. The increase primarily resulted from:
•
•
•
Improved earnings from WRB Refining LP, mainly due to higher refining margins.
Improved earnings from CPChem, primarily due to higher margins and volumes in the olefins and polyolefins business line and the
startup of Q-Chem II at the end of 2010.
Improved earnings from DCP Midstream, primarily as a result of higher natural gas liquids prices.
Net gain on dispositions increased $1,397 million in 2011. Gains in 2011 primarily resulted from the disposition of Seaway Products Pipeline
Company and our interests in Seaway Crude Pipeline Company and Colonial Pipeline Company, partially offset by the loss on sale of WRG in
2011. Gains in 2010 mainly included the gain on sale of our 50 percent interest in CFJ Properties. For additional information, see
Note 5—Assets Held for Sale or Sold, in the Combined Financial Statements.
Impairments decreased 72 percent in 2011, primarily as a result of the $1,514 million impairment of WRG in 2010, partially offset by the $467
million Trainer Refinery impairment in 2011. For additional information, see Note 9—Impairments, in the Combined Financial Statements.
Foreign currency transaction gains increased $119 million in 2011, as a result of the U.S. dollar weakening against the British pound and euro
during 2011, compared with a strengthening in 2010.
See Note 17—Income Taxes, in the Combined Financial Statements, for information regarding our provision for income taxes and effective tax
rate.
2010 vs. 2009
Sales and other operating revenues increased 30 percent in 2010, while purchased crude oil and products increased 34 percent. These increases
were primarily due to higher prices for petroleum products, crude oil and natural gas liquids.
Equity in earnings of affiliates increased 62 percent in 2010. The increase primarily resulted from:
•
•
Improved earnings from CPChem primarily due to higher margins in the olefins and polyolefins business line.
Improved earnings from Merey Sweeny, L.P. (MSLP) as a result of increased volumes and petroleum coke prices.
Net gain on dispositions increased $162 million in 2010. The increase primarily reflected the gain on sale of our 50 percent interest in CFJ
Properties.
Impairments increased $1,633 million in 2010, primarily as a result of the second quarter 2010 impairment of WRG.
Foreign currency transaction losses increased $138 million in 2010, as a result of the U.S. dollar strengthening against the British pound and
euro during 2010.
See Note 17—Income Taxes, in the Combined Financial Statements, for information regarding our provision for income taxes and effective tax
rate.
133
Table of Contents
Segment Results
R&M
2011
Net Income (Loss) Attributable to Phillips 66
United States
International
Year Ended December 31
2010
Millions of Dollars
2009
$
3,637
211
1,013
(867 )
(124 )
195
$
3,848
146
71
Dollars Per Barrel
Refining Margins
United States
International
$
7.05
8.90
10.45
5.95
4.83
5.14
Dollars Per Gallon
U.S. Average Wholesale Prices*
Gasoline
Distillates
$
2.24
2.30
2.94
3.12
1.84
1.76
*Excludes excise taxes.
Thousands of Barrels Daily
Operating Statistics
Refining operations*
United States
Crude oil capacity**
Crude oil processed
Capacity utilization (percent)
Refinery production
International
Crude oil capacity**
Crude oil processed
Capacity utilization (percent)
Refinery production
Worldwide
Crude oil capacity**
Crude oil processed
Capacity utilization (percent)
Refinery production
Petroleum products sales volumes
United States
Gasoline
Distillates
Other products
International
*Includes our share of equity affiliates.
1,986
1,782
1,986
1,731
91
1,932
90
1,958
87
1,891
426
409
671
374
671
495
96
419
56
383
74
504
2,365
2,166
2,657
2,156
2,657
2,226
92
2,351
81
2,341
84
2,395
1,129
884
401
1,120
873
400
1,130
858
367
2,414
714
2,393
647
2,355
619
3,128
3,040
2,974
1,939
1,757
%
%
%
**Represents weighted-average crude oil capacity for the period indicated. Actual crude oil capacity effective October 1, 2011, was 1,801 thousand barrels per day (BPD) in the United States
and 2,227 thousand BPD worldwide, reflecting the idling of the Trainer Refinery.
134
Table of Contents
The R&M segment refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels); buys, sells
and transports crude oil; and buys, transports, distributes and markets petroleum products. This segment also includes power generation
operations. R&M has operations mainly in the United States, Europe and Asia.
2011 vs. 2010
U.S. R&M
U.S. R&M reported earnings of $3,637 million in 2011, an increase of $2,624 million compared with 2010. The increase in 2011 was primarily
due to significantly higher U.S. refining margins and gains from asset sales. In 2011, gains from asset sales of $1,627 million after-tax mainly
resulted from the sales of Seaway Products Pipeline Company, and our equity investments in Seaway Crude Pipeline Company and Colonial
Pipeline Company, while 2010 included the $113 million after-tax gain on the sale of our 50 percent interest in CFJ Properties in 2010. These
increases were partially offset by the $303 million after-tax impairment and warehouse inventory write-down associated with the idling of our
Trainer Refinery in 2011.
Our U.S. refining crude oil capacity utilization rate was 91 percent in 2011, compared with 90 percent for 2010. The current year rate mainly
reflected lower turnaround activity, partially offset by higher planned and unplanned downtime.
International R&M
International R&M earnings were $211 million in 2011, compared with a loss of $867 million in 2010. The increase in 2011 was mostly due to
the absence of the 2010 WRG impairment, in addition to higher refining volumes and foreign currency gains in 2011. These increases were
partially offset by lower refining margins and the $86 million after-tax loss on sale of WRG and related warehouse inventory write-downs in
2011.
Our international refining crude oil capacity utilization rate was 96 percent in 2011, compared with 56 percent in 2010. The increase primarily
resulted from the removal of WRG from our refining capacities effective January 1, 2011, and lower turnaround activity.
2010 vs. 2009
U.S. R&M
Earnings from U.S. R&M were $1,013 million in 2010, compared with a loss of $124 million in 2009. The increase in 2010 primarily resulted
from significantly higher refining margins and the gain on sale of our 50 percent interest in CFJ Properties. Higher refining and marketing
volumes also contributed to the improvement in earnings.
Our U.S. refining crude oil capacity utilization rate was 90 percent in 2010, compared with 87 percent in 2009. The increase in 2010 was
primarily due to lower turnaround activity, lower run reductions due to market conditions and less unplanned downtime.
International R&M
International R&M reported a loss of $867 million in 2010, compared with earnings of $195 million in 2009. The loss in 2010 primarily
resulted from the WRG impairment and a $29 million after-tax impairment resulting from our decision to end participation in the Yanbu
Refinery Project. Excluding these impairments, earnings were improved due to higher refining margins, partially offset by foreign currency
losses.
Our international refining crude oil capacity utilization rate was 56 percent in 2010, compared with 74 percent in 2009. The 2010 rate primarily
reflected run reductions at WRG in response to market conditions.
135
Table of Contents
Midstream
Year Ended December 31
2010
2011
Millions of Dollars
2009
Net Income Attributable to Phillips 66*
$
403
262
317
* Includes DCP Midstream-related earnings:
$
287
210
199
Dollars Per Barrel
Average Sales Prices
U.S. natural gas liquids*
Consolidated
Equity affiliates
45.42
41.28
$ 57.79
50.64
33.63
29.80
* Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by natural gas liquids component and location mix.
Thousands of Barrels Daily
Operating Statistics
Natural gas liquids extracted*
Natural gas liquids fractionated**
*Includes
**Excludes
192
112
184
120
179
133
our share of equity affiliates.
DCP Midstream.
The Midstream segment purchases raw natural gas from producers and gathers natural gas through an extensive network of pipeline gathering
systems. The natural gas is then processed to extract natural gas liquids from the raw gas stream. The remaining “residue” gas is marketed to
electrical utilities, industrial users and gas marketing companies. Most of the natural gas liquids are fractionated—separated into individual
components like ethane, butane and propane—and marketed as chemical feedstock, fuel or blendstock. The Midstream segment consists of our
50 percent equity investment in DCP Midstream, as well as our other natural gas gathering and processing operations, and natural gas liquids
fractionation, trading and marketing businesses in the United States and Canada. The Midstream segment also includes our 25 percent
ownership interest in Rockies Express Pipeline, LLC (REX).
2011 vs. 2010
Midstream earnings increased 54 percent in 2011, compared with 2010. The increase was primarily due to higher equity earnings from DCP
Midstream as a result of significantly higher natural gas liquids prices. Indexed natural gas liquids prices were 27 percent higher in 2011 than in
2010. Also benefitting 2011 earnings were higher fees received for NGL fractionation services, reflecting favorably renegotiated contracts.
These items were partially offset by higher costs at DCP Midstream, primarily due to higher maintenance and repair costs and increased
depreciation expense.
2010 vs. 2009
Midstream earnings decreased 17 percent in 2010. Higher natural gas liquids prices were more than offset by the 2009 recognition of an $88
million after-tax benefit, which resulted from a DCP Midstream subsidiary converting subordinated units to common units. Higher operating
expenses, which resulted from higher turnaround activity, also contributed to the decrease in earnings.
136
Table of Contents
Chemicals
2011
Net Income Attributable to Phillips 66
$
Year Ended
December 31
2010
Millions of Dollars
2009
486
716
228
Millions of Pounds
CPChem Externally Marketed Sales Volumes
Olefins and polyolefins
Specialties, aromatics and styrenics
14,313
6,704
12,585
6,318
12,751
5,629
21,017
18,903
18,380
The Chemicals segment consists of our 50 percent interest in CPChem, which we account for under the equity method. CPChem uses natural
gas liquids and other feedstocks to produce petrochemicals. These products are then marketed and sold, or used as feedstocks to produce
plastics and commodity chemicals.
2011 vs. 2010
Chemicals segment earnings increased 47 percent in 2011, compared with 2010. The improvement primarily resulted from higher margins,
volumes and equity earnings from CPChem’s olefins and polyolefins business line. The specialties, aromatics and styrenics business line also
contributed to the increase in earnings due to higher margins.
2010 vs. 2009
Earnings from the Chemicals segment increased $258 million in 2010, primarily due to substantially higher margins in the olefins and
polyolefins business line and, to a lesser extent, improved margins from the specialties, aromatics and styrenics business line. Higher
operating costs partially offset these increases.
Corporate and Other
Millions of Dollars
Year Ended
December 31
2010
2011
Net Loss Attributable to Phillips 66
Interest expense
Corporate general and administrative expenses
Technology
Other
2009
(11 )
(76 )
(53 )
(52 )
(71 )
(44 )
(44 )
(1 )
(49 )
(52 )
(38 )
$ (192 )
(159 )
(140 )
$
2011 vs. 2010
Interest expense increased $11 million in 2011, primarily as a result of various tax-related adjustments in 2010. Technology consists of
activities focused on new technologies related to refining, alternative energy, biofuels and the environment. Technology’s net loss increased in
2011, mainly due to higher project expenses and lower licensing revenues. The category “Other” includes certain foreign currency transaction
137
Table of Contents
gains and losses, environmental costs associated with sites no longer in operation, and other costs not directly associated with an operating
segment. Changes in the “Other” category are mainly due to higher environmental expenses associated with sites no longer in operation.
2010 vs. 2009
Corporate general and administrative expenses increased $22 million in 2010, primarily as a result of costs related to compensation and benefit
plans. Technology’s net loss decreased in 2010, primarily due to higher licensing revenues and lower project expenses.
138
Table of Contents
CAPITAL RESOURCES AND LIQUIDITY
Significant Sources of Capital
Historically, cash generated from operating activities was our primary source of liquidity and capital resources. In addition, we received
proceeds from asset dispositions, and either proceeds or disbursements from our parent company.
Operating Activities
During 2011, cash of $5,006 million was provided by operating activities, a 139 percent increase from cash from operations of $2,092 million
in 2010. The improvement in the 2011 period reflects:
•
•
•
A significant improvement in U.S. refining margins during 2011, particularly refineries in our Central region which benefited from
the discount of WTI-based crude feedstocks compared with waterborne crude.
Increased distributions from equity affiliates, including CPChem, DCP Midstream and WRB.
Inventory liquidations in 2011, compared with builds in 2010.
During 2010, cash of $2,092 million was provided by operating activities, a 121 percent increase from cash from operations of $946 million in
2009. The increase was primarily due to higher refining margins and increased distributions from equity affiliates.
Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, prices for natural gas liquids, and
chemicals margins, as well as power generation margins. Refining margins were low throughout 2009, and showed improvement during 2010
and 2011, before experiencing a sharp decline in the fourth quarter of 2011. Natural gas liquids prices and chemicals margins generally
followed this trend. Prices and margins in our industry are typically volatile, and are driven by market conditions over which we have little or
no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating
cash flows.
Generally, demand for gasoline is higher during the spring and summer months than during the fall and winter months in most of our markets
due to seasonal changes in highway traffic. As a result, our operating results in the first and fourth quarters are generally lower than in the
second and third quarters. However, our cash flow from operations may not always follow this seasonal trend in operating results, due to
working capital fluctuations associated with inventory management. Historically, we have built inventory levels during the first quarter (thus
lowering cash flow from operations) and lowered inventory levels in the fourth quarter (increasing cash flow from operations). Prior to the
separation, our ability to fund discretionary inventory builds was supported by ConocoPhillips’ capital resources. After the separation, we must
rely on our own capital resources, which could impact the level of discretionary inventory activity we fund.
The level and quality of output from our refineries impacts our cash flows. The output at our refineries is impacted by such factors as operating
efficiency, maintenance turnarounds, market conditions, feedstock availability and weather conditions. We actively manage the operations of
our refineries, and typically, any variability in their operations has not been as significant to cash flows as that caused by margins and prices.
Our operating cash flows are also impacted by dividend decisions made by our equity affiliates, including WRB, DCP Midstream and
CPChem. Over the three years ended December 31, 2011, we received dividends of $500 million from WRB, $783 million from DCP
Midstream and $1,148 million from CPChem. We cannot control the amount of future dividends from equity affiliates; therefore future
dividend payments by these companies are not assured.
139
Table of Contents
Asset Sales
Proceeds from asset sales in 2011 were $2,627 million, compared with $662 million in 2010 and $757 million in 2009. The 2011 proceeds
from asset sales included the sale of our ownership interests in Colonial Pipeline Company and Seaway Crude Pipeline Company, as well as
the Wilhelmshaven Refinery and Seaway Products Pipeline Company. The 2010 proceeds included the sale of our 50 percent interest in CFJ
Properties. Proceeds in 2009 included the sale of our interests in four Keystone pipeline entities.
Credit Facilities
To provide us with additional liquidity following the separation, in February 2012 we entered into a five-year revolving credit agreement with a
syndicate of financial institutions. Under the revolving credit agreement, upon the consummation of the separation and the satisfaction of
certain other conditions, we will have a borrowing capacity of up to $4.0 billion.
The revolving credit agreement contains covenants that we consider usual and customary for an agreement of this type for comparable
commercial borrowers, including a maximum consolidated net debt-to-capitalization ratio of 60 percent. The agreement has customary events
of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts; violation of covenants; cross-payment
default and cross-acceleration (in each case, to indebtedness in excess of a threshold amount); and a change of control.
Borrowings under the credit agreement bear interest at LIBOR plus a margin based on the credit rating of our senior unsecured long-term debt.
For example, assuming a BBB or Baa2 credit rating for our senior unsecured long-term debt, the drawn margin would be 137.5 basis points on
Eurocurrency loans. The revolving credit agreement also provides for customary fees, including administrative agent fees, commitment fees
and other fees.
The foregoing summary description of the revolving credit agreement is qualified by reference to the terms of the agreement, which is included
as an exhibit to the registration statement on Form 10 of which this Information Statement is a part.
As an additional source of liquidity following the separation, we intend to enter into a trade receivables securitization facility with an aggregate
principal amount of approximately $1.2 billion, and a tenor of three years.
Other Indebtedness
In accordance with the plan of reorganization, we expect to incur up to $7.8 billion of new debt and will accept assignment of approximately
$0.2 billion of existing ConocoPhillips debt associated with downstream operations. During March 2012, we issued, through a private
placement, $800 million aggregate principal amount of 1.950% Senior Notes due 2015, $1.5 billion aggregate principal amount of 2.950%
Senior Notes due 2017, $2.0 billion aggregate principal amount of 4.300% Senior Notes due 2022, and $1.5 billion aggregate principal amount
of 5.875% Senior Notes due 2042. The indenture governing the notes provides that the notes will be guaranteed by Phillips 66 Company,
effective upon the delivery by us and Phillips 66 Company of an officers’ certificate to the trustee under the indenture that the guarantee
contained in the indenture is effective. In connection with the private placement, we and Phillips 66 Company granted the initial purchasers of
the notes certain registration rights under a Registration Rights Agreement. The form of the terms of the notes and the Registration Rights
Agreement are filed as exhibits to the registration statement on Form 10 of which this Information Statement is a part. The net proceeds from
the offering were deposited in two segregated escrow accounts. The amounts in the escrow accounts will be released to us on the date that we
deliver a written notice to the escrow agents that, among other items, the contribution to Phillips 66 of the downstream business of
ConocoPhillips, in connection with its
140
Table of Contents
separation from ConocoPhillips, has been consummated in all material respects under the terms described in the offering memorandum for the
offering of the notes (which are substantially the same as described in this Information Statement).
The remaining $2.0 billion of new debt will consist of a three-year amortizing term loan. At separation, we plan to retain a minimum of $2.0
billion of cash and cash equivalents and pay a cash distribution of approximately $5.8 billion to ConocoPhillips, subject to the working capital
adjustments described below.
Our senior unsecured long-term debt has been rated investment grade by Moody’s Investors Service and Standard & Poor’s Ratings Services,
based on our expected capital structure and a comparison with peers in our industry. We do not have any ratings triggers on any of our
corporate debt that would cause an automatic default, and thereby impact our access to liquidity, in the event of a downgrade of our credit
rating. If our credit rating deteriorated to a level prohibiting us from accessing the commercial paper market, we would expect to be able to
access funds under our $5.2 billion in liquidity facilities. See “Business and Properties—Segment and Geographic Information—Chemicals”
for information on ratings triggers related to our investment in CPChem.
Working Capital
Our working capital balance (including inventories) will be “trued up” from its actual balance at the time of the separation to a level that we
and ConocoPhillips agree to be normal for our company. This true-up process may result in an adjustment to our initial cash balance or the
special cash distribution made to ConocoPhillips at the date of separation, along with a post-separation date adjustment once the
separation-date balance sheet is finalized. Although the actual balances of working capital at the date of separation cannot be reliably predicted,
it is anticipated that our inventory levels will be lower than normal at the separation. Thus the amount of our special cash distribution to
ConocoPhillips likely will be reduced (absent other non-inventory working capital impacts), with a corresponding increase in our initial $2
billion cash balance. Any incremental cash balance above $2 billion is expected to be used to increase inventory levels after the separation. The
effect of this true-up is that, following the separation and post true-up, we would have working capital in an amount consistent with our
historical operations, as well as $2 billion of cash and cash equivalents on our balance sheet.
Because of the opportunities we expect to be available to us following the separation, including internally generated cash flow and access to
capital markets, we believe our short-term and long-term liquidity will be adequate to fund not only our operations, but also our anticipated
near-term and long-term funding requirements, including capital spending programs, dividend payments, defined benefit plan contributions,
repayment of debt maturities and other amounts that may ultimately be paid in connection with contingencies.
Shelf Registration
We plan to file a universal shelf registration statement with the SEC under which we expect to have the ability to issue and sell an
indeterminate amount of various types of debt and equity securities. However, because we will not have filed periodic reports under the
Securities Exchange Act of 1934 on a standalone basis, our ability to utilize the shelf registration procedures as a well-known seasoned issuer
at the time of the separation will depend in part on ConocoPhillips’ filing status.
141
Table of Contents
Off-Balance Sheet Arrangements
As part of our normal ongoing business operations, we enter into agreements with other parties to pursue business opportunities, which share
costs and apportion risks among the parties as governed by the agreements. In connection with the separation, we expect to enter into
agreements to guarantee certain outstanding debt obligations of MSLP. The aggregate principal amount of joint venture debt guaranteed by us
is expected to be approximately $250 million. The fair value of these guarantees is not expected to be material.
For additional information about guarantees, see Note 12—Guarantees, in the Combined Financial Statements.
Capital Requirements
For information about our capital expenditures and investments, see “Capital Spending” below.
At the separation, we anticipate our debt-to-capital ratio will exceed our target range of 20 to 30 percent. Accordingly, we expect to prioritize
any excess cash flow available after paying dividends and funding capital expenditures toward debt reduction, with a target debt level of
approximately $6 billion, and increasing our cash balance to approximately $3 billion to further enhance the strength of our balance sheet.
We have provided loan financing to WRB to assist it in meeting its operating and capital spending requirements. At December 31, 2010 and
2009, $550 million and $350 million, respectively, of such financing were outstanding. The loans were fully repaid during 2011.
After the separation, we expect to pay a quarterly dividend of $0.20 per share, beginning in the third quarter of 2012. However, the declaration
and amount of all dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many
factors, including our financial condition, earnings, capital requirements of our business, covenants associated with certain debt obligations,
legal requirements, regulatory constraints, industry practice and other factors the Board deems relevant. See “Dividend Policy” elsewhere in
this Information Statement.
142
Table of Contents
Contractual Obligations
The following table summarizes our aggregate contractual fixed and variable obligations as of December 31, 2011.
Millions of Dollars
Payments Due by Period
Debt obligations (a)
Capital lease obligations
$
Total debt
Interest on debt and other obligations
Operating lease obligations
Purchase obligations (b)
Other long-term liabilities
Asset retirement obligations
Accrued environmental costs
Unrecognized tax benefits (c)
Total
$
Total
Up to
1 Year
Years
2-3
Years
4-5
After
5 Years
377
14
22
8
25
2
28
3
302
1
391
30
27
31
303
65
1,746
122,508
11
426
49,825
18
558
9,552
14
327
6,313
22
435
56,818
378
542
44
56
76
44
125,674
50,468
15
93
(c )
10,263
14
51
(c )
6,750
293
322
(c )
58,193
(a)
For additional information, see Note 11—Debt, in the Combined Financial Statements.
(b)
Represents any agreement to purchase goods or services that is enforceable and legally binding and that specifies all significant terms.
The majority of the purchase obligations are market-based contracts, including exchanges and futures, for the purchase of products such
as crude oil and unfractionated natural gas liquids. The products are mostly used to supply our refineries and fractionators, optimize the
supply chain, and resell to customers. Product purchase commitments with third parties totaled $62,426 million. In addition, $50,741
million are product purchases from CPChem, mostly for natural gas and natural gas liquids over the remaining term of 88 years, and
Excel Paralubes, for base oil over the remaining initial term of 14 years.
Purchase obligations of $6,983 million are related to agreements to access and utilize the capacity of third-party equipment and
facilities, including pipelines and product terminals, to transport, process, treat, and store products. The remainder is primarily our net
share of purchase commitments for materials and services for jointly owned facilities where we are the operator.
(c)
Excludes unrecognized tax benefits of $125 million because the ultimate disposition and timing of any payments to be made with
regard to such amounts are not reasonably estimable. Although unrecognized tax benefits are not a contractual obligation, they are
presented in this table because they represent potential demands on our liquidity.
143
Table of Contents
Capital Spending
Capital Expenditures and Investments
R&M
United States
International
Millions of Dollars
2010
2011
2009
751
237
798
276
1,294
513
988
1,074
1,807
17
17
68
8
639
15
$
1,022
1,150
2,461
$
785
237
874
276
1,948
513
$
1,022
1,150
2,461
$
Midstream
Chemicals
Corporate and Other
United States
International
R&M
Capital spending for the R&M segment during the three-year period ended December 31, 2011, was primarily for air emission reduction and
clean fuels projects to meet new environmental standards, refinery upgrade projects to improve product yields and increase heavy crude oil
processing capability, improvements to the operating integrity of key processing units and safety-related projects. During this three-year period,
R&M capital spending was $3.9 billion.
Key projects completed during the three-year period included:
•
•
•
•
•
•
Installation of a 20,000-barrel-per-day hydrocracker at the Rodeo facility of our San Francisco Refinery.
Installation of a 225-ton-per-day sulfur plant at the Sweeny Refinery.
Installation of facilities to reduce emissions from the fluid catalytic crackers at the Alliance and Sweeny refineries.
Installation of facilities to reduce nitrous oxide emissions from the crude furnace and installation of a new vacuum furnace at
Bayway Refinery.
Completion of gasoline benzene reduction projects at the Alliance and Ponca City refineries.
Expansion and other capital improvements at the Immingham combined heat and power cogeneration plant near our Humber
Refinery in the United Kingdom.
Major construction activities in progress include:
•
•
Installation, revamp and expansion of equipment at the Bayway Refinery to enable production of low benzene gasoline.
U.S. programs aimed at air emission reductions.
Generally, our equity affiliates in the R&M segment are intended to have self-funding capital programs. Although WRB did not require capital
infusions from us during the three-year period ended December 31, 2011, we did provide loan financing to WRB to assist it in meeting its
operating and capital spending requirements. WRB repaid these loans in full during 2011. During this three-year period, on a 100 percent
144
Table of Contents
basis, WRB’s capital expenditures and investments were $3.9 billion. We expect WRB’s 2012 capital program to be self-funding.
Midstream
Capital spending for the Midstream segment during the three-year period ended December 31, 2011, was primarily for investment in REX. The
project was related to construction of a natural gas pipeline extending from Cheyenne, Colorado to Clarington, Ohio. We are currently
forecasting REX to be self-funding through 2012.
During the three-year period ended December 31, 2011, DCP Midstream had a self-funded capital program, and thus required no new capital
infusions from us or our co-venturer. During this three-year period, on a 100 percent basis, DCP Midstream’s capital expenditures and
investments were $2.9 billion. We are currently forecasting DCP Midstream to remain self-funding through 2012.
Chemicals
During the three-year period ended December 31, 2011, CPChem had a self-funded capital program, and thus required no new capital infusions
from us or our co-venturer. During the three-year period, on a 100 percent basis, CPChem’s capital expenditures, investments and advances
were $1.4 billion. Our agreement with Chevron regarding CPChem provides for CPChem to: (i) prior to the separation, suspend all cash
distributions to its owners and accumulate its excess cash; and (ii) after the separation, use the accumulated cash and its excess cash flow to
retire its $1 billion of outstanding fixed-rate bonds on an accelerated basis. During this period of bond repayment, CPChem is not required to
make any cash distributions to its owners. In addition, after the separation, the agreement generally provides that instead of CPChem incurring
debt, CPChem’s owners will make capital infusions as necessary to fund CPChem’s capital requirements to the extent these requirements
exceed CPChem’s available cash from operations.
2012 Budget
ConocoPhillips has set a 2012 capital budget for its Refining and Marketing segment of $1.2 billion, with approximately $1.0 billion of this
amount targeted toward projects in the United States. These funds are expected to be used primarily for projects relating to sustaining and
improving the existing business with a focus on safety, regulatory compliance, efficiency and reliability.
Contingencies
A number of lawsuits involving a variety of claims have been made against us that arise in the ordinary course of business. We also may be
required 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 active and inactive sites. We regularly assess the need for accounting recognition or disclosure of these
contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable
and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate
than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party
recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related
contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.
Based on currently available information, we believe 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 our combined financial statements. As we learn new facts
concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly
sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and
145
Table of Contents
legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup
costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of
other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional
information becomes available during the administrative and litigation processes.
Legal and Tax Matters
Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a
litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and
quantification of potential exposures in individual cases. This process also enables us to track those cases that have been scheduled for trial
and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about
current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment
of existing accruals, or establishment of new accruals, are required. See Note 17—Income Taxes, in the Combined Financial Statements, for
additional information about income-tax-related contingencies.
Environmental
We are subject to the same numerous international, federal, state and local environmental laws and regulations as other companies in our
industry. The most significant of these environmental laws and regulations include, among others, the:
•
•
•
•
•
•
•
•
•
U.S. Federal Clean Air Act, which governs air emissions.
U.S. Federal Clean Water Act, which governs discharges to water bodies.
European Union Regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (REACH).
U.S. Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which imposes liability on
generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are
threatening to occur.
U.S. Federal Resource Conservation and Recovery Act (RCRA), which governs the treatment, storage and disposal of solid waste.
U.S. Federal Emergency Planning and Community Right-to-Know Act (EPCRA), which requires facilities to report toxic chemical
inventories with local emergency planning committees and response departments.
U.S. Federal Safe Drinking Water Act, which governs the disposal of wastewater in underground injection wells.
U.S. Federal Oil Pollution Act of 1990 (OPA90), under which owners and operators of onshore facilities and pipelines, lessees or
permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and
damages that result from a discharge of oil into navigable waters of the United States.
European Union Trading Directive resulting in European Emissions Trading Scheme.
These laws and their implementing regulations set limits on emissions and, in the case of discharges to water, establish water quality limits.
They also, in most cases, require permits in association with new or modified operations. These permits can require an applicant to collect
substantial information in connection with the application process, which can be expensive and time consuming. In addition, there can be
delays associated with notice and comment periods and the agency’s processing of the application. Many of the delays associated with the
permitting process are beyond the control of the applicant.
146
Table of Contents
Many states and foreign countries where we operate also have, or are developing, similar environmental laws and regulations governing these
same types of activities. While similar, in some cases these regulations may impose additional, or more stringent, requirements that can add to
the cost and difficulty of marketing or transporting products across state and international borders.
The ultimate financial impact arising from environmental laws and regulations is neither clearly known nor easily determinable as new
standards, such as air emission standards, water quality standards and stricter fuel regulations, continue to evolve. However, environmental
laws and regulations, including those that may arise to address concerns about global climate change, are expected to continue to have an
increasing impact on our operations in the United States and in other countries in which we operate. Notable areas of potential impacts include
air emission compliance and remediation obligations in the United States.
An example in the fuels area is the Energy Policy Act of 2005, which imposed obligations to provide increasing volumes of renewable fuels in
transportation motor fuels through 2012. These obligations were changed with the enactment of the Energy Independence and Security Act of
2007. The 2007 law requires fuel producers and importers to provide additional renewable fuels for transportation motor fuels that include a
mix of various types to be included through 2022. We have met the increased requirements to date while establishing implementation,
operating and capital strategies, along with advanced technology development, to address projected future requirements.
We also are subject to certain laws and regulations relating to environmental remediation obligations associated with current and past
operations. Such laws and regulations include CERCLA and RCRA and their state equivalents. Remediation obligations include cleanup
responsibility arising from petroleum releases from underground storage tanks located at numerous past and present owned and/or operated
petroleum-marketing outlets throughout the United States. Federal and state laws require contamination caused by such underground storage
tank releases be assessed and remediated to meet applicable standards. In addition to other cleanup standards, many states adopted cleanup
criteria for methyl tertiary-butyl ether (MTBE) for both soil and groundwater.
At RCRA-permitted facilities, we are required to assess environmental conditions. If conditions warrant, we may be required to remediate
contamination caused by prior operations. In contrast to CERCLA, which is often referred to as “Superfund,” the cost of corrective action
activities under RCRA corrective action programs typically is borne solely by us. We anticipate increased expenditures for RCRA remediation
activities may be required, but such annual expenditures for the near term are not expected to vary significantly from the range of such
expenditures we have experienced over the past few years. Longer-term expenditures are subject to considerable uncertainty and may fluctuate
significantly.
We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging we
are a potentially responsible party under CERCLA or an equivalent state statute. On occasion, we also have been made a party to cost recovery
litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various
sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2011, we reported
we had been notified of potential liability under CERCLA and comparable state laws at 61 sites around the United States.
For most Superfund sites, our potential liability will be significantly less than the total site remediation costs because the percentage of waste
attributable to us, versus that attributable to all other potentially responsible parties, is relatively low. Although liability of those potentially
responsible is generally joint and several for federal sites and frequently so for state sites, other potentially responsible parties at sites where we
are a party typically have had the financial strength to meet their obligations, and where they have not, or where
147
Table of Contents
potentially responsible parties could not be located, our share of liability has not increased materially. Many of the sites at which we are
potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially
responsible normally assess site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may
have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the parties obtain EPA or equivalent state agency
approval. There are relatively few sites where we are a major participant, and given the timing and amounts of anticipated expenditures, neither
the cost of remediation at those sites nor such costs at all CERCLA sites, in the aggregate, is expected to have a material adverse effect on our
competitive or financial condition.
Expensed environmental costs were $452 million in 2011 and are expected to be approximately $455 million per year in 2012 and 2013.
Capitalized environmental costs were $286 million in 2011 and are expected to be approximately $475 million per year in 2012 and 2013.
Accrued liabilities for remediation activities are not reduced for potential recoveries from insurers or other third parties and are not discounted
(except those assumed in a purchase business combination, which we do record on a discounted basis).
Many of these liabilities result from CERCLA, RCRA and similar state laws that require us to undertake certain investigative and remedial
activities at sites where we conduct, or once conducted, operations or at sites where our generated waste was disposed. We also have accrued
for a number of sites we identified that may require environmental remediation, but which are not currently the subject of CERCLA, RCRA or
state enforcement activities. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the future, we may
incur significant costs under both CERCLA and RCRA. Remediation activities vary substantially in duration and cost from site to site,
depending on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies,
and the presence or absence of potentially liable third parties. Therefore, it is difficult to develop reasonable estimates of future site remediation
costs.
At December 31, 2011, our balance sheet included total accrued environmental costs of $542 million, compared with $554 million at
December 31, 2010, and $558 million at December 31, 2009. We expect to incur a substantial amount of these expenditures within the next
30 years.
Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are
inherent concerns in our operations and products, and there can be no assurance that material costs and liabilities will not be incurred.
However, we currently do not expect any material adverse effect upon our results of operations or financial position as a result of compliance
with current environmental laws and regulations.
Climate Change
There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) reduction.
These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws in this
field continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs
relating to implementation, such laws, if enacted, could have a material impact on our results of operations and financial condition. Examples
of legislation or precursors for possible regulation that do or could affect our operations include:
•
European Emissions Trading Scheme (ETS), the program through which many of the European Union (EU) member states are
implementing the Kyoto Protocol.
148
Table of Contents
•
•
•
•
•
California’s Global Warming Solutions Act, which requires the California Air Resources Board to develop regulations and market
mechanisms that will target reduction of California’s GHG emissions by 25 percent by 2020.
The U.S. Supreme Court decision in Massachusetts v. EPA , 549 U.S. 497, 127 S.Ct. 1438 (2007), confirming that the EPA has the
authority to regulate carbon dioxide as an “air pollutant” under the Federal Clean Air Act.
The EPA’s announcement on March 29, 2010 (published as “Interpretation of Regulations that Determine Pollutants Covered by
Clean Air Act Permitting Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department of Transportation’s
joint promulgation of a Final Rule on April 1, 2010, that triggers regulation of GHGs under the Clean Air Act, may trigger more
climate-based claims for damages, and may result in longer agency review time for development projects to determine the extent of
climate change.
Carbon taxes in certain jurisdictions.
Cap and trade programs in certain jurisdictions.
In the EU, we have assets that are subject to the ETS. The first phase of the EU ETS was completed at the end of 2007, with EU ETS Phase II
running from 2008 through 2012. The European Commission has approved most of the Phase II national allocation plans. We are actively
engaged to minimize any financial impact from the trading scheme.
In the United States, some additional form of regulation may be forthcoming in the future at the federal or state levels with respect to GHG
emissions. Such regulation could take any of several forms that may result in the creation of additional costs in the form of taxes, the restriction
of output, investments of capital to maintain compliance with laws and regulations, or required acquisition or trading of emission allowances.
We are working to continuously improve operational and energy efficiency through resource and energy conservation throughout our
operations.
Compliance with changes in laws and regulations that create a GHG emission trading scheme or GHG reduction policies could significantly
increase our costs, reduce demand for fossil energy derived products, impact the cost and availability of capital and increase our exposure to
litigation. Such laws and regulations could also increase demand for less carbon intensive energy sources. The ultimate impact on our financial
performance, either positive or negative, will depend on a number of factors, including but not limited to:
•
•
•
•
•
•
•
•
Whether and to what extent legislation is enacted.
The nature of the legislation (such as a cap and trade system or a tax on emissions).
The GHG reductions required.
The price and availability of offsets.
The amount and allocation of allowances.
Technological and scientific developments leading to new products or services.
Any potential significant physical effects of climate change (such as increased severe weather events, changes in sea levels and
changes in temperature).
Whether, and the extent to which, increased compliance costs are ultimately reflected in the prices of our products and services.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to select appropriate
accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. See
Note 2—Accounting Policies, in the Combined Financial Statements, for descriptions of our major accounting policies. Certain of these
149
Table of Contents
accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts
would have been reported under different conditions, or if different assumptions had been used. The following discussions of critical
accounting estimates, along with the discussion of contingencies in this report, address all important accounting areas where the nature of
accounting estimates or assumptions could be material due to the levels of subjectivity and judgment necessary to account for highly uncertain
matters or the susceptibility of such matters to change.
Impairments
Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant
deterioration in future cash flows expected to be generated by an asset group and annually in the fourth quarter following updates to corporate
planning assumptions. If, upon review, the sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, the
carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes based on a judgmental assessment
of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of
assets—generally at an entire complex level. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of
impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent
with those used by principal market participants, or based on a multiple of operating cash flow validated with historical market transactions of
similar assets where possible. The expected future cash flows used for impairment reviews and related fair value calculations are based on
judgmental assessments of future volumes, commodity prices, operating costs, margins and capital project decisions, considering all available
information at the date of review.
Investments in nonconsolidated entities accounted for under the equity method are reviewed for impairment when there is evidence of a loss in
value and annually following updates to corporate planning assumptions. Such evidence of a loss in value might include our inability to recover
the carrying amount, the lack of sustained earnings capacity which would justify the current investment amount, or a current fair value less than
the investment’s carrying amount. When it is determined such a loss in value is other than temporary, an impairment charge is recognized for
the difference between the investment’s carrying value and its estimated fair value. When determining whether a decline in value is other than
temporary, management considers factors such as the length of time and extent of the decline, the investee’s financial condition and near-term
prospects, and our ability and intention to retain our investment for a period that will be sufficient to allow for any anticipated recovery in
the market value of the investment. When quoted market prices are not available, the fair value is usually based on the present value of
expected future cash flows using discount rates believed to be consistent with those used by principal market participants, plus market analysis
of comparable assets owned by the investee, if appropriate. Differing assumptions could affect the timing and the amount of an impairment of
an investment in any period.
Asset Retirement Obligations
Under various contracts, permits and regulations, we have material legal obligations to remove tangible equipment and restore the land at the
end of operations at certain operational sites. Our largest asset removal obligations involve asbestos abatement at refineries. Estimating the
future asset removal costs necessary for this accounting calculation is difficult. Most of these removal obligations are many years, or decades,
in the future and the contracts and regulations often have vague descriptions of what removal practices and criteria must be met when the
removal event actually occurs. Asset removal technologies and costs, regulatory and other compliance considerations, expenditure timing, and
other inputs into valuation of the obligation, including discount and inflation rates, are also subject to change.
150
Table of Contents
Environmental Costs
In addition to asset retirement obligations discussed above, under the above or similar contracts, permits and regulations, we have certain
obligations to complete environmental-related projects. These projects are primarily related to cleanup at domestic refineries, underground
storage sites and non-operated sites. Future environmental remediation costs are difficult to estimate because they are subject to change due to
such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the
determination of our liability in proportion to that of other responsible parties.
Intangible Assets and Goodwill
At December 31, 2011, we had $701 million of intangible assets determined to have indefinite useful lives, thus they are not amortized. This
judgmental assessment of an indefinite useful life must be continuously evaluated in the future. If, due to changes in facts and circumstances,
management determines these intangible assets have definite useful lives, amortization will commence at that time on a prospective basis. As
long as these intangible assets are judged to have indefinite lives, they will be subject to periodic lower-of-cost-or-market tests that require
management’s judgment of the estimated fair value of these intangible assets.
At December 31, 2011, we had $3.3 billion of goodwill recorded in conjunction with past business combinations. Under the accounting rules
for goodwill, this intangible asset is not amortized. Instead, goodwill is subject to annual reviews for impairment at a reporting unit level. The
reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business
is managed. A reporting unit is an operating segment or a component that is one level below an operating segment. We determined we had one
reporting unit for purposes of assigning goodwill and testing for impairment—the R&M operating segment. We have concluded the refining
and marketing components within the R&M segment are economically similar enough to be aggregated into one reporting unit.
If we later reorganize our businesses or management structure so that our operating segments change, or such that the components within our
reporting unit are no longer economically similar, the reporting units would be revised and goodwill would be re-assigned using a relative fair
value approach. Goodwill impairment testing at a lower reporting unit level could result in the recognition of impairment that would not
otherwise be recognized at the current higher level of aggregation. In addition, the sale or disposition of a portion of our reporting unit will be
allocated a portion of the reporting unit’s goodwill, based on relative fair values, which will adjust the amount of gain or loss on the sale or
disposition. When assessing the need for impairments on those sales and disposals, we take into consideration the anticipated allocation of
goodwill and provisionally provide for its expected impairment upon final sale or disposal.
Because quoted market prices for our reporting unit are not available, management must apply judgment in determining the estimated fair value
of this reporting unit for purposes of performing the periodic goodwill impairment test. Management uses all available information to make this
fair value determination, including the present values of expected future cash flows using discount rates commensurate with the risks involved
in the assets and observed market multiples of operating cash flows and net income. In addition, if the estimated fair value of the reporting unit
is less than the book value (including the goodwill), further management judgment must be applied in determining the fair values of individual
assets and liabilities for purposes of the hypothetical purchase price allocation. At year-end 2011, the estimated fair value of our R&M
operating segment (reporting unit), was higher than recorded net book values (including goodwill) of the reporting unit. However, a lower fair
value estimate in the future could result in an impairment. After the separation, our common stock price and associated total company market
capitalization will also be considered in the determination of reporting unit fair value. A prolonged or significant decline in our stock price
could provide evidence of a need to record a material impairment of goodwill.
151
Table of Contents
Tax Assets and Liabilities
Our operations are subject to various tax liabilities, including federal, state and foreign income taxes and transactional taxes such as excise,
sales/use, property and payroll taxes. We record tax liabilities based on our assessment of existing tax laws and regulations. The recording of
tax liabilities may require significant judgment and estimates. A contingent liability related to a transactional tax claim is recorded if the loss is
both probable and estimable. Actual incurred tax liabilities can vary from our estimates for a variety of reasons, including different
interpretations of tax laws and regulations and different assessments of the amount of tax due.
We recognize the financial statement effects of an income tax position when it is more likely than not that the position will be sustained upon
examination by a taxing authority. In determining our income tax provision, we must assess the likelihood our deferred tax assets will be
recovered through future taxable income. Judgment is required in estimating the amount of valuation allowance, if any, that should be recorded
against those deferred income tax assets. Valuation allowances reduce deferred tax assets to an amount that will, more likely than not, be
realized. Based on our historical taxable income, our expectations for the future, and available tax-planning strategies, we expect the net
deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as reductions in future taxable income. If our actual results
of operations differ from such estimates or our estimates of future taxable income change, the valuation allowance may need to be revised.
New tax laws and regulations, as well as changes to existing tax laws and regulations, are continuously being proposed or promulgated. The
implementation of future legislative and regulatory tax initiatives could result in increased tax liabilities that cannot be predicted at this time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Instrument Market Risk
We and certain of our subsidiaries hold and issue derivative contracts and financial instruments that expose our cash flows or earnings to
changes in commodity prices, foreign currency exchange rates or interest rates. We may use financial and commodity-based derivative
contracts to manage the risks produced by changes in the prices of crude oil and related products, natural gas and electric power; fluctuations in
interest rates and foreign currency exchange rates; or to capture market opportunities.
Prior to the separation, our use of derivative instruments is governed by ConocoPhillips’ “Authority Limitations” document approved by
ConocoPhillips’ Board of Directors that prohibits the use of highly leveraged derivatives or derivative instruments without sufficient market
liquidity for comparable valuations. The Authority Limitations document also establishes the Value at Risk (VaR) limits for us, and compliance
with these limits is monitored daily. ConocoPhillips’ Chief Financial Officer monitors risks resulting from foreign currency exchange rates and
interest rates and reports to ConocoPhillips’ Chief Executive Officer. ConocoPhillips’ senior vice president of Commercial monitors
commodity price risk and also reports to ConocoPhillips’ Chief Executive Officer. The Commercial organization manages our commercial
marketing, optimizes our commodity flows and positions, and monitors related risks of our businesses. We anticipate similar governance will
apply to our use of derivative instruments after the separation.
Commodity Price Risk
We sell into or receive supply from the worldwide crude oil, bitumen, refined products, natural gas, natural gas liquids, and electric power
markets and are exposed to fluctuations in the prices for these commodities.
152
Table of Contents
These fluctuations can affect our revenues and purchases, as well as the cost of operating, investing and financing activities. Generally, our
policy is to remain exposed to the market prices of commodities.
Our Commercial organization uses futures, forwards, swaps and options in various markets to optimize the value of our supply chain, which
may move our risk profile away from market average prices to accomplish the following objectives:
•
•
•
•
Balance physical systems. In addition to cash settlement prior to contract expiration, exchange-traded futures contracts also may be
settled by physical delivery of the commodity, providing another source of supply to meet our refinery requirements or marketing
demand.
Meet customer needs. Consistent with our policy to generally remain exposed to market prices, we use swap contracts to convert
fixed-price sales contracts, which are often requested by refined product consumers, to a floating market price.
Manage the risk to our cash flows from price exposures on specific crude oil, refined product, natural gas, and electric power
transactions.
Enable us to use the market knowledge gained from these activities to capture market opportunities such as moving physical
commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to
capture quality upgrades. Derivatives may be utilized to optimize these activities.
We use a VaR model to estimate the loss in fair value that could potentially result on a single day from the effect of adverse changes in market
conditions on the derivative financial instruments and derivative commodity instruments held or issued, including commodity purchase and
sales contracts recorded on the balance sheet at December 31, 2011, as derivative instruments. Using Monte Carlo simulation, a 95 percent
confidence level and a one-day holding period, the VaR for those instruments issued or held for trading purposes at December 31, 2011 and
2010, was immaterial to our cash flows and net income.
The VaR for instruments held for purposes other than trading at December 31, 2011 and 2010, was also immaterial to our cash flows and net
income.
Interest Rate Risk
We have debt that is sensitive to changes in U.S. interest rates. Our historically low debt levels, however, render our market risk from interest
rates immaterial. With the expected increase in debt at the separation, we expect our market risk from interest rates to increase.
Foreign Currency Exchange Risk
We have foreign currency exchange rate risk resulting from international operations. We do not comprehensively hedge the exposure to
currency rate changes although we may choose to selectively hedge certain foreign currency exchange rate exposures, such as firm
commitments for capital projects or local currency tax payments, dividends and cash returns from net investments in foreign affiliates to be
remitted within the coming year.
At December 31, 2011 and 2010, our foreign currency derivative activity was not material.
For additional information about our use of derivative instruments, see Note 14—Financial Instruments and Derivative Contracts, in the
Combined Financial Statements.
153
Table of Contents
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHILLIPS 66
INDEX TO FINANCIAL STATEMENTS
Page
F-2
Report of Independent Registered Public Accounting Firm
Audited Combined Financial Statements of Phillips 66:
Combined Statement of Income for the years ended December 31, 2011, 2010 and 2009
F-3
Combined Statement of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009
F-4
Combined Balance Sheet at December 31, 2011 and 2010
F-5
Combined Statement of Cash Flows for the years ended December 31, 2011, 2010
and 2009
F-6
Combined Statement of Changes in Net Investment for the years ended
December 31, 2011, 2010 and 2009
F-7
Notes to Combined Financial Statements
F-8
Schedule II—Valuation and Qualifying Accounts (Combined)
F-47
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ConocoPhillips
We have audited the accompanying combined balance sheets of Phillips 66 as of December 31, 2011 and 2010, and the related combined
statements of income, comprehensive income, changes in net investment, and cash flows for each of the three years in the period ended
December 31, 2011. Our audits also included the financial statement schedule listed in the Index to Financial Statements. These financial
statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Phillips 66 at
December 31, 2011 and 2010, and the combined results of its operations and its cash flows for each of the three years in the period ended
December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information
set forth therein.
/s/ Ernst & Young LLP
Houston, Texas
March 1, 2012
F-2
Table of Contents
Combined Statement of Income
Phillips 66
Years Ended December 31
Millions of Dollars
2010
2011
2009
196,088
2,843
1,638
45
146,561
1,765
241
89
112,692
1,092
79
88
200,614
148,656
113,951
172,837
4,072
1,409
908
472
14,288
21
17
(34 )
125,092
4,189
1,384
880
1,699
13,985
22
1
85
193,990
147,337
113,104
Income before income taxes
Provision for income taxes
6,624
1,844
1,319
579
847
368
Net income
Less: net income attributable to noncontrolling interests
4,780
(5 )
740
(5 )
479
(3 )
Revenues and Other Income
Sales and other operating revenues*
Equity in earnings of affiliates
Net gain on dispositions
Other income
$
Total Revenues and Other Income
Costs and Expenses
Purchased crude oil and products
Operating expenses
Selling, general and administrative expenses
Depreciation and amortization
Impairments
Taxes other than income taxes*
Accretion on discounted liabilities
Interest and debt expense
Foreign currency transaction (gains) losses
Total Costs and Expenses
93,156
4,097
1,314
879
66
13,620
24
1
(53 )
Net Income Attributable to Phillips 66
$
4,775
735
476
*Includes excise taxes on petroleum product sales:
See Notes to Combined Financial Statements.
$
13,955
13,689
13,325
F-3
Table of Contents
Combined Statement of Comprehensive Income
Phillips 66
Years Ended December 31
Millions of Dollars
2010
740
2009
479
(8 )
(8 )
2
3
2
3
(5 )
(41 )
17
(6 )
(23 )
12
5
46
(16 )
(29 )
(17 )
35
28
(92 )
(95 )
(4 )
214
(22 )
(64 )
(99 )
192
2
(1 )
2
(1 )
3
2
Hedging activities, net of tax
1
1
5
Other comprehensive income (loss), net of tax
(92 )
(115 )
232
4,688
(5 )
625
(5 )
711
(3 )
620
708
2011
$ 4,780
Net Income
Other comprehensive income (loss)
Defined benefit plans
Net gain (loss) arising during the period
Reclassification adjustment for amortization of prior net losses included in
net income
Net change
Other plans*
Income taxes on defined benefit plans
Defined benefit plans, net of tax
Foreign currency translation adjustments
Income taxes on foreign currency adjustments
Foreign currency translation adjustments, net of tax
Hedging activities
Income taxes on hedging activities
Comprehensive income
Less: comprehensive income attributable to noncontrolling interests
Comprehensive Income Attributable to Phillips 66
$ 4,683
*Plans for which Phillips 66 is not the primary obligor—primarily those administered by equity affiliates.
See Notes to Combined Financial Statements.
F-4
Table of Contents
Combined Balance Sheet
Phillips 66
At December 31
Millions of Dollars
2011
Assets
Cash and cash equivalents
Accounts and notes receivable (net of allowance of $13 million in 2011
and $7 million in 2010)
Accounts and notes receivable—related parties
Inventories
Prepaid expenses and other current assets
2010
-
-
8,354
1,671
3,466
457
8,364
1,849
4,113
378
13,948
10,306
1
14,771
3,332
732
121
14,704
9,918
401
15,409
3,633
777
113
$
43,211
44,955
$
10,007
785
30
1,087
64
411
9,814
937
29
1,182
89
452
Total Current Liabilities
Long-term debt
Asset retirement obligations and accrued environmental costs
Deferred income taxes
Employee benefit obligations
Other liabilities and deferred credits
12,384
361
787
5,803
117
466
12,503
388
802
4,817
111
308
Total Liabilities
19,918
18,929
Net Investment
Accumulated other comprehensive income
Net parent company investment
122
23,142
214
25,787
Total
Noncontrolling interests
23,264
29
26,001
25
Total Net Investment
23,293
26,026
43,211
44,955
$
Total Current Assets
Investments and long-term receivables
Loans and advances—related parties
Net properties, plants and equipment
Goodwill
Intangibles
Other assets
Total Assets
Liabilities
Accounts payable
Accounts payable—related parties
Short-term debt
Accrued income and other taxes
Employee benefit obligations
Other accruals
Total Liabilities and Net Investment
$
See Notes to Combined Financial Statements.
F-5
Table of Contents
Combined Statement of Cash Flows
Phillips 66
Years Ended December 31
2011
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization
Impairments
Accretion on discounted liabilities
Deferred taxes
Undistributed equity earnings
Net gain on dispositions
Other
Working capital adjustments
Decrease (increase) in accounts and notes receivable
Decrease (increase) in inventories
Decrease (increase) in prepaid expenses and other current assets
Increase (decrease) in accounts payable
Increase (decrease) in taxes and other accruals
$
Net Cash Provided by Operating Activities
Cash Flows From Investing Activities
Capital expenditures and investments
Proceeds from asset dispositions
Long-term advances/loans—related parties
Collection of advances/loans—related parties
Other
Millions of Dollars
2010
2009
4,780
740
479
908
472
21
931
(951 )
(1,638 )
167
880
1,699
22
(33 )
(723 )
(241 )
(53 )
879
66
24
(84 )
(562 )
(79 )
(174 )
(186 )
616
28
58
(200 )
(3,019 )
(344 )
(2 )
3,003
163
(2,087 )
237
183
2,606
(542 )
5,006
2,092
946
(1,022 )
2,627
550
337
(1,150 )
662
(200 )
20
16
(2,461 )
757
(350 )
1
80
(652 )
(1,973 )
Net Cash Provided by (Used in) Investing Activities
2,492
Cash Flows From Financing Activities
Contributions from (distributions to) parent company
Repayment of debt
Other
(7,471 )
(26 )
(1 )
(1,411 )
(26 )
(3 )
1,056
(25 )
(4 )
Net Cash Provided by (Used in) Financing Activities
(7,498 )
(1,440 )
1,027
Net Change in Cash and Cash Equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year
$
See Notes to Combined Financial Statements.
F-6
-
-
-
-
-
-
Table of Contents
Combined Statement of Changes in Net Investment
Phillips 66
Millions of Dollars
December 31, 2008
Net income
Other comprehensive income
Net transfers from parent
company
Distributions to noncontrolling
interests and other
$
Attributable to Phillips 66
Accum. Other
Net Parent
Comprehensive
Company
Income
Investment
97
24,902
476
232
-
1,210
-
-
December 31, 2009
Net income
Other comprehensive loss
Net transfers to parent
company
Distributions to noncontrolling
interests and other
329
(115 )
December 31, 2010
Net income
Other comprehensive loss
Net transfers to parent
company
Distributions to noncontrolling
interests and other
214
(92 )
December 31, 2011
26,588
735
-
-
(1,536 )
-
25,787
4,775
-
-
$
(7,420 )
-
-
122
23,142
See Notes to Combined Financial
Statements.
F-7
Noncontrolling
Interests
23
3
-
Total
25,022
479
232
-
1,210
(3 )
(3 )
23
5
-
26,940
740
(115 )
-
(1,536 )
(3 )
(3 )
25
5
-
26,026
4,780
(92 )
-
(7,420 )
(1 )
29
(1 )
23,293
Table of Contents
Notes to Combined Financial Statements
Phillips 66
Note 1—Separation and Basis of Presentation
The Separation
On July 14, 2011, ConocoPhillips announced approval by its Board of Directors to pursue the separation of its upstream and downstream
businesses into two stand-alone, publicly traded corporations. This separation is expected to be completed in accordance with a separation and
distribution agreement between ConocoPhillips and Phillips 66. ConocoPhillips intends to distribute, on a pro rata basis, all of the shares of
Phillips 66 common stock to the ConocoPhillips stockholders as of the record date for the separation. Phillips 66 was incorporated in Delaware
as a wholly owned subsidiary of ConocoPhillips in November 2011. The separation is subject to market conditions, customary regulatory
approvals, the receipt of an affirmative Internal Revenue Service ruling with respect to the tax-free nature of the separation, and final approval
by ConocoPhillips’ Board of Directors.
Basis of Presentation
These combined financial statements were prepared in connection with the expected separation and are derived from the consolidated financial
statements and accounting records of ConocoPhillips. These statements reflect the combined historical results of operations, financial position
and cash flows of ConocoPhillips’ refining, marketing and transportation operations; its natural gas gathering, processing, transmission and
marketing operations, primarily conducted through its equity investment in DCP Midstream, LLC; its petrochemical operations, conducted
through its equity investment in Chevron Phillips Chemical Company LLC (CPChem); its power generation operations; and an allocable
portion of corporate costs. Although the legal transfer of these downstream businesses of ConocoPhillips into Phillips 66 has yet to take place,
for ease of reference, these combined financial statements are collectively referred to as those of Phillips 66. Unless otherwise stated or the
context otherwise indicates, all references in these combined financial statements to “us,” “our” or “we” mean the downstream businesses of
ConocoPhillips, which are referred to as Phillips 66.
These financial statements are presented as if such businesses had been combined for all periods presented. All intercompany transactions and
accounts within Phillips 66 have been eliminated. The assets and liabilities in the combined financial statements have been reflected on a
historical cost basis, as immediately prior to the separation all of the assets and liabilities presented are wholly owned by ConocoPhillips and
are being transferred within the ConocoPhillips consolidated group. The combined statement of income also includes expense allocations for
certain corporate functions historically performed by ConocoPhillips and not allocated to its operating segments, including allocations of
general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. These
allocations are based primarily on specific identification of time and/or activities associated with Phillips 66, employee headcount or capital
expenditures. Our management believes the assumptions underlying the combined financial statements, including the assumptions regarding
allocating general corporate expenses from ConocoPhillips, are reasonable. Nevertheless, the combined financial statements may not include
all of the actual expenses that would have been incurred had we been a stand-alone company during the periods presented and may not reflect
our combined results of operations, financial position and cash flows had we been a stand-alone company during the periods presented. Actual
costs that would have been incurred if we had been a stand-alone company would depend on multiple factors, including organizational
structure and strategic decisions made in various areas, including information technology and infrastructure.
F-8
Table of Contents
ConocoPhillips uses a centralized approach to the cash management and financing of its operations. Our cash is transferred to ConocoPhillips
daily and ConocoPhillips funds our operating and investing activities as needed. Accordingly, the cash and cash equivalents held by
ConocoPhillips at the corporate level were not allocated to us for any of the periods presented. We reflect transfers of cash to and from
ConocoPhillips’ cash management system as a component of “Net parent company investment” on our combined balance sheet. We have
included debt incurred from our limited direct financing on our balance sheet, as this debt is specific to our business. We also have not included
any interest expense for intercompany cash advances from ConocoPhillips, since historically ConocoPhillips has not allocated interest expense
related to intercompany advances to any of its businesses.
Events and transactions subsequent to the balance sheet date have been evaluated through March 1, 2012, the date these combined financial
statements were issued, for potential recognition or disclosure in the combined financial statements.
Note 2—Accounting Policies

Combination Principles and Investments — Our combined financial statements include the accounts of majority-owned, controlled
subsidiaries and variable interest entities where we are the primary beneficiary. The equity method is used to account for investments in
affiliates in which we have the ability to exert significant influence over the affiliates’ operating and financial policies. When we do not
have the ability to exert significant influence, the investment is either classified as available-for-sale if fair value is readily determinable,
or the cost method is used if fair value is not readily determinable. Undivided interests in pipelines, natural gas plants and terminals are
combined on a proportionate basis. Other securities and investments are generally carried at cost.

Net Parent Company Investment — In the combined balance sheet, net parent company investment represents ConocoPhillips’
historical investment in us, our accumulated net earnings after taxes, and the net effect of transactions with, and allocations from,
ConocoPhillips.

Foreign Currency Translation — Adjustments resulting from the process of translating foreign functional currency financial
statements into U.S. dollars are included in accumulated other comprehensive income in net investment. Foreign currency transaction
gains and losses are included in current earnings. Most of our foreign operations use their local currency as the functional currency.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from these estimates.

Revenue Recognition — Revenues associated with sales of crude oil, natural gas liquids, petroleum and chemical products, and other
items are recognized when title passes to the customer, which is when the risk of ownership passes to the purchaser and physical delivery
of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry.
Revenues associated with transactions commonly called buy/sell contracts, in which the purchase and sale of inventory with the same
counterparty are entered into “in contemplation” of one another, are combined and reported net (i.e., on the same income statement line).

Shipping and Handling Costs — We record shipping and handling costs in purchased crude oil and products. Freight costs billed to
customers are recorded as a component of revenue.
F-9
Table of Contents

Inventories — We have several valuation methods for our various types of inventories and consistently use the following methods for
each type of inventory. Crude oil and petroleum products inventories are valued at the lower of cost or market in the aggregate, primarily
on the last-in, first-out (LIFO) basis. Any necessary lower-of-cost-or-market write-downs at year end are recorded as permanent
adjustments to the LIFO cost basis. LIFO is used to better match current inventory costs with current revenues and to meet
tax-conformity requirements. Costs include both direct and indirect expenditures incurred in bringing an item or product to its existing
condition and location, but not unusual/nonrecurring costs or research and development costs. Materials and supplies inventories are
valued using the weighted-average-cost method.

Fair Value Measurements — We categorize assets and liabilities measured at fair value into one of three different levels depending on
the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or
liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly
or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting significant
modifications to observable related market data or our assumptions about pricing by market participants.

Derivative Instruments — Derivative instruments are recorded on the balance sheet at fair value. If the right of offset exists and certain
other criteria are met, derivative assets and liabilities with the same counterparty are netted on the balance sheet and the collateral
payable or receivable is netted against derivative assets and derivative liabilities, respectively.
Recognition and classification of the gain or loss that results from recording and adjusting a derivative to fair value depends on the
purpose for issuing or holding the derivative. Gains and losses from derivatives not accounted for as hedges are recognized immediately
in earnings. For derivative instruments that are designated and qualify as a fair value hedge, the gains or losses from adjusting the
derivative to its fair value will be immediately recognized in earnings and, to the extent the hedge is effective, offset the concurrent
recognition of changes in the fair value of the hedged item. Gains or losses from derivative instruments that are designated and qualify as
a cash flow hedge or hedge of a net investment in a foreign entity are recognized in other comprehensive income and appear on the
balance sheet in accumulated other comprehensive income until the hedged transaction is recognized in earnings; however, to the extent
the change in the value of the derivative exceeds the change in the anticipated cash flows of the hedged transaction, the excess gains or
losses will be recognized immediately in earnings.

Capitalized Interest — Interest from external borrowings is capitalized on major projects with an expected construction period of one
year or longer. Capitalized interest is added to the cost of the underlying asset’s properties, plant and equipment and is amortized over
the useful life of the assets.
Although parent company interest expense on general corporate debt is not allocated to us in these combined financial statements, our
properties, plants and equipment balance does include capitalized interest from such debt if our projects met the criteria for interest
capitalization.

Intangible Assets Other Than Goodwill — Intangible assets with finite useful lives are amortized by the straight-line method over their
useful lives. Intangible assets with indefinite useful lives are not amortized but are tested at least annually for impairment. Each reporting
period, we evaluate the remaining useful lives of intangible assets not being amortized to determine whether events and circumstances
continue to support indefinite useful lives. These indefinite-lived intangibles are
F-10
Table of Contents
considered impaired if the fair value of the intangible asset is lower than net book value. The fair value of intangible assets is determined
based on quoted market prices in active markets, if available. If quoted market prices are not available, fair value of intangible assets is
determined based upon the present values of expected future cash flows using discount rates believed to be consistent with those used by
principal market participants, or upon estimated replacement cost, if expected future cash flows from the intangible asset are not
determinable.

Goodwill —Goodwill resulting from a business combination is not amortized but is tested at least annually for impairment. If the fair
value of a reporting unit is less than the recorded book value of the reporting unit’s assets (including goodwill), less liabilities, then a
hypothetical purchase price allocation is performed on the reporting unit’s assets and liabilities using the fair value of the reporting unit
as the purchase price in the calculation. If the amount of goodwill resulting from this hypothetical purchase price allocation is less than
the recorded amount of goodwill, the recorded goodwill is written down to the new amount. For purposes of goodwill impairment
calculations, Worldwide Refining and Marketing is our only reporting unit.

Depreciation and Amortization —Depreciation and amortization of properties, plants and equipment are determined by either the
individual-unit-straight-line method or the group-straight-line method (for those individual units that are highly integrated with other
units).

Impairment of Properties, Plants and Equipment —Properties, plants and equipment used in operations are assessed for impairment
whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be
generated by an asset group and annually in the fourth quarter following updates to corporate planning assumptions. If, upon review, the
sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, the carrying value is written down to
estimated fair value through additional amortization or depreciation provisions and reported as impairments in the periods in which the
determination of the impairment is made. Individual assets are grouped for impairment purposes at the lowest level for which identifiable
cash flows are largely independent of the cash flows of other groups of assets—generally at an entire complex level. Because there
usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the
present values of expected future cash flows using discount rates believed to be consistent with those used by principal market
participants or based on a multiple of operating cash flow validated with historical market transactions of similar assets where possible.
Long-lived assets committed by management for disposal within one year are accounted for at the lower of amortized cost or fair value,
less cost to sell, with fair value determined using a binding negotiated price, if available, or present value of expected future cash flows
as previously described.
The expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future volumes,
prices, costs, margins, and capital project decisions, considering all available evidence at the date of review.

Impairment of Investments in Nonconsolidated Entities —Investments in nonconsolidated entities are assessed for impairment
whenever changes in the facts and circumstances indicate a loss in value has occurred and annually following updates to corporate
planning assumptions. When such a condition is judgmentally determined to be other than temporary, the carrying value of the
investment is written down to fair value. The fair value of the impaired investment is based on quoted market prices, if available, or upon
the present value of expected future cash flows using discount rates believed to be consistent with those used by principal market
participants, plus market analysis of comparable assets owned by the investee, if appropriate.
F-11
Table of Contents

Maintenance and Repairs — Costs of maintenance and repairs, which are not significant improvements, are expensed when incurred.
Major refinery maintenance turnarounds are expensed as incurred.

Advertising Costs — Production costs of media advertising are deferred until the first public showing of the advertisement. Advances to
secure advertising slots at specific sporting or other events are deferred until the event occurs. All other advertising costs are expensed as
incurred, unless the cost has benefits that clearly extend beyond the interim period in which the expenditure is made, in which case the
advertising cost is deferred and amortized ratably over the interim periods that clearly benefit from the expenditure.

Property Dispositions — When complete units of depreciable property are sold, the asset cost and related accumulated depreciation are
eliminated, with any gain or loss reflected in the “Net gain on dispositions” line of our combined statement of income. When less than
complete units of depreciable property are disposed of or retired, the difference between asset cost and salvage value is charged or
credited to accumulated depreciation.

Asset Retirement Obligations and Environmental Costs — Fair value of legal obligations to retire and remove long-lived assets are
recorded in the period in which the obligation is incurred. When the liability is initially recorded, we capitalize this cost by increasing the
carrying amount of the related properties, plants and equipment. Over time the liability is increased for the change in its present value,
and the capitalized cost in properties, plants and equipment is depreciated over the useful life of the related asset. For additional
information, see Note 10—Asset Retirement Obligations and Accrued Environmental Costs.
Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures relating to an
existing condition caused by past operations, and those having no future economic benefit, are expensed. Liabilities for environmental
expenditures are recorded on an undiscounted basis (unless acquired in a purchase business combination) when environmental
assessments or cleanups are probable and the costs can be reasonably estimated. Recoveries of environmental remediation costs from
other parties, such as state reimbursement funds, are recorded as assets when their receipt is probable and estimable.

Guarantees — Fair value of a guarantee is determined and recorded as a liability at the time the guarantee is given. The initial liability is
subsequently reduced as we are released from exposure under the guarantee. We amortize the guarantee liability over the relevant time
period, if one exists, based on the facts and circumstances surrounding each type of guarantee. In cases where the guarantee term is
indefinite, we reverse the liability when we have information indicating the liability is essentially relieved or amortize it over an
appropriate time period as the fair value of our guarantee exposure declines over time. We amortize the guarantee liability to the related
income statement line item based on the nature of the guarantee. When it becomes probable we will have to perform on a guarantee, we
accrue a separate liability if it is reasonably estimable, based on the facts and circumstances at that time. We reverse the fair value
liability only when there is no further exposure under the guarantee.

Stock-Based Compensation — We recognize stock-based compensation expense over the shorter of: (1) the service period (i.e., the
time required to earn the award); or (2) the period beginning at the start of the service period and ending when an employee first
becomes eligible for retirement, but not less than six months, which is the minimum time required for an award to not be subject to
forfeiture. We have elected to recognize expense on a straight-line basis over the service period for the entire award, whether the award
was granted with ratable or cliff vesting.
F-12
Table of Contents

Pension and Postretirement Plans — Certain of our U.S. and U.K. employees participate in defined benefit pension plans and
postretirement health and life insurance plans (Shared Plans) sponsored by ConocoPhillips, which include participants of other
ConocoPhillips subsidiaries. We account for such Shared Plans as multiemployer benefit plans. Accordingly, we do not record an asset
or liability to recognize the funded status of the Shared Plans. We recognize a liability only for any required contributions to the Shared
Plans that are accrued and unpaid at the balance sheet date. The related pension and postretirement expenses are allocated to Phillips 66
based primarily on pensionable compensation of active participants.
Plans in Austria, Germany, and Ireland that are sponsored by entities included in Phillips 66 (Direct Plans) are accounted for as defined
benefit pension plans. Accordingly, the funded and unfunded position of each Direct Plan is recorded in our combined balance sheet.
Actuarial gains and losses that have not yet been recognized through income are recorded in accumulated other comprehensive income
within net investment, net of taxes, until they are amortized as a component of net periodic benefit cost. The determination of benefit
obligations and the recognition of expenses related to Direct Plans are dependent on various assumptions. The major assumptions
primarily relate to discount rates, long-term expected rates of return on plan assets, and future compensation increases. Management
develops each assumption using relevant company experience in conjunction with market-related data for each individual country in
which such plans exist. For additional information, see Note 16—Employee Benefit Plans.

Income Taxes — Our taxable income is included in the U.S. federal income tax returns and in a number of state income tax returns of
ConocoPhillips. In the accompanying combined financial statements, our provision for income taxes is computed as if we were a
stand-alone tax-paying entity.
Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial
reporting basis and the tax basis of our assets and liabilities, except for deferred taxes on income considered to be permanently reinvested
in certain foreign subsidiaries and foreign corporate joint ventures. Allowable tax credits are applied as reductions of the provision for
income taxes. Interest related to unrecognized tax benefits is reflected in interest expense, and penalties in operating expenses.

Taxes Collected from Customers and Remitted to Governmental Authorities — Excise taxes are reported gross within sales and
other operating revenues and taxes other than income taxes, while other sales and value-added taxes are recorded net in taxes other than
income taxes.
Note 3—Changes in Accounting Principles
Comprehensive Income
Effective December 31, 2011, we early adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)
No. 2011-05, “Presentation of Comprehensive Income.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 220,
“Comprehensive Income,” by requiring a more prominent presentation of the components of other comprehensive income. We elected the
two-statement approach, presenting other comprehensive income in a separate statement immediately following the income statement. On
December 23, 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications
of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.” ASU 2011-12 defers the ASU 2011-05 requirement to
present items reclassified into net income from other comprehensive income. This deferral only impacted the presentation requirement on the
combined income statement.
F-13
Table of Contents
Note 4—Inventories
Inventories at December 31 consisted of the following:
Crude oil and petroleum products
Materials and supplies
$
$
Millions of Dollars
2011
3,193
273
3,466
2010
3,839
274
4,113
Inventories valued on the LIFO basis totaled $3,046 million and $3,724 million at December 31, 2011 and 2010, respectively. The estimated
excess of current replacement cost over LIFO cost of inventories amounted to approximately $8,600 million and $7,000 million at
December 31, 2011 and 2010, respectively.
For our Refining and Marketing (R&M) segment, certain reductions in inventory caused liquidations of LIFO inventory values. These
liquidations increased net income by approximately $155 million and $30 million in 2011 and 2010, respectively, and decreased net income by
approximately $65 million in 2009.
Note 5—Assets Held for Sale or Sold
During 2009, we sold U.S. marketing assets with a net properties, plants and equipment carrying value of $505 million and recognized
before-tax gains of $26 million. We had other dispositions in 2009 with a net carrying value of $569 million that resulted in before-tax gains of
$52 million, primarily our interest in certain R&M pipelines. Also during 2009, we classified additional marketing assets as held for sale.
Accordingly, at December 31, 2009, we classified $323 million of noncurrent assets as held for sale and most of this amount was included in
“Prepaid expenses and other current assets” on our combined balance sheet. We also classified $75 million of noncurrent deferred tax liabilities
as current, based on their held for sale status. We sold these held-for-sale assets and others during 2010, resulting in before-tax gains totaling
$241 million.
In August 2011, we sold our refinery in Wilhelmshaven, Germany, which had been operating as a terminal since the fourth quarter of 2009.
The refinery was included in our R&M segment and at the time of disposition had a net carrying value of $211 million, which included $243
million of properties, plants and equipment. A $234 million before-tax loss was recognized from this disposition.
In October 2011, we sold Seaway Products Pipeline Company to DCP Midstream. The total carrying value of the asset, which was included in
our R&M segment, was $84 million, consisting of $55 million of net properties, plants and equipment and $29 million of allocated goodwill.
The sale resulted in a before-tax gain of $312 million, 50 percent of which was recognized in current period earnings, while the remaining 50
percent will be deferred and amortized as part of the basis difference of our investment in the equity affiliate.
In December 2011, we sold our ownership interests in Colonial Pipeline Company and Seaway Crude Pipeline Company. The total carrying
value of these assets, which were included in our R&M segment, was $348 million, including $104 million of investment in equity affiliates
and $244 million of allocated goodwill. A $1,661 million before-tax gain was recognized from these dispositions.
Gains and losses from asset sales are included in the “Net gain on dispositions” line in the combined income statement.
F-14
Table of Contents
Note 6—Investments, Loans and Long-Term Receivables
Components of investments, loans and long-term receivables at December 31 were:
Equity investments
Loans and advances—related parties
Long-term receivables
Other investments
$
$
Millions of Dollars
2011
10,233
1
68
5
10,307
2010
9,454
401
451
13
10,319
Equity Investments
Affiliated companies in which we had a significant equity investment at December 31, 2011, included:
•
•
•
•
•
WRB Refining LP—50 percent owned business venture with Cenovus Energy Inc.—owns the Wood River and Borger refineries,
which process crude oil into refined products.
DCP Midstream—50 percent owned joint venture with Spectra Energy—owns and operates gas plants, gathering systems, storage
facilities and fractionation plants.
CPChem—50 percent owned joint venture with Chevron Corporation—manufactures and markets petrochemicals and plastics.
Malaysian Refining Company Sdn. Bdh. (MRC)—47 percent owned business venture with Petronas, the Malaysian state oil
company—owns the Melaka, Malaysia refinery which processes crude oil into refined products.
Rockies Express Pipeline LLC (REX)—25 percent owned joint venture with Kinder Morgan Energy Partners and Sempra Energy
Corp.—owns and operates a natural gas pipeline system from the Rocky Mountains, Colorado to eastern Ohio.
Summarized 100 percent financial information for equity method investments in affiliated companies, combined, was as follows:
Revenues
Income before income taxes
Net income
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
$
2011
59,044
6,083
5,742
8,752
34,329
6,837
10,279
Millions of Dollars
2010
45,123
3,659
3,390
8,515
33,923
6,978
11,957
2009
40,418
2,241
1,984
8,154
32,242
8,230
9,717
Our share of income taxes incurred directly by the equity companies is included in equity in earnings of affiliates, and as such is not included in
the provision for income taxes in our combined financial statements.
At December 31, 2011, net parent company investment included $2,540 million related to the undistributed earnings of affiliated companies.
Dividends received from affiliates were $2,209 million, $1,110 million and $570 million in 2011, 2010 and 2009, respectively.
F-15
Table of Contents
WRB
In 2007, we entered into a business venture with Cenovus to create a 50/50 U.S. downstream limited partnership, WRB Refining LP. We use
the equity method of accounting for this entity.
WRB’s operating assets consist of the Wood River and Borger refineries, located in Roxana, Illinois, and Borger, Texas, respectively. As a
result of our contribution of these two assets to WRB, a basis difference was created because the fair value of the contributed assets recorded
by WRB exceeded their historical book value. The difference is primarily amortized and recognized as a benefit evenly over a period of
26 years, which was the estimated remaining useful life of the refineries’ property, plant and equipment at the closing date. At December 31,
2011, the book value of our investment in WRB was $3,722 million, and the basis difference was $3,918 million. Equity earnings in 2011,
2010 and 2009 were increased by $185 million, $243 million and $209 million, respectively, due to amortization of the basis difference. We are
the operator and managing partner of WRB. Cenovus is obligated to contribute $7.5 billion, plus accrued interest, to WRB over a 10-year
period that began in 2007.
DCP Midstream
DCP Midstream owns and operates gas plants, gathering systems, storage facilities and fractionation plants. At December 31, 2011, the book
value of our equity method investment in DCP Midstream was $927 million. DCP Midstream markets a portion of its natural gas liquids to us
and CPChem under a supply agreement that continues at the current volume commitment with a primary term ending December 31, 2014. This
purchase commitment is on an “if-produced, will-purchase” basis and so has no fixed production schedule, but has had, and is expected over
the remaining term of the contract to have, a relatively stable purchase pattern. Natural gas liquids are purchased under this agreement at
various published market index prices, less transportation and fractionation fees. In 2009, a DCP Midstream subsidiary converted subordinated
units into common units, and as a result, we recognized a $135 million before-tax deferred gain in equity earnings.
CPChem
CPChem manufactures and markets petrochemicals and plastics. At December 31, 2011, the book value of our equity method investment in
CPChem was $2,998 million. We have multiple supply and purchase agreements in place with CPChem, ranging in initial terms from one to
99 years, with extension options. These agreements cover sales and purchases of refined products, solvents, and petrochemical and natural gas
liquids feedstocks, as well as fuel oils and gases. Delivery quantities vary by product, and are generally on an “if-produced, will-purchase”
basis. All products are purchased and sold under specified pricing formulas based on various published pricing indices.
In anticipation of the separation, we reached agreement with Chevron Corporation regarding CPChem that provides for CPChem to: (i) prior to
the separation, suspend all cash distributions to its owners and accumulate its excess cash; and (ii) after the separation, use the accumulated
cash and its excess cash flow to retire its $1 billion of outstanding fixed-rate bonds on an accelerated basis. During this period of bond
repayment, CPChem is not required to make any cash distributions to its owners.
MRC
MRC’s operating asset is a refinery in Melaka, Malaysia. The refinery operates in merchant mode in which each co-venturer sells crude oil to
MRC and purchases the resulting refined product yield. At December 31, 2011, the book value of our equity method investment in MRC was
$1,043 million.
F-16
Table of Contents
REX
REX owns a natural gas pipeline that runs from northwestern Colorado to eastern Ohio, which became fully operational in November 2009.
Long-term, binding firm commitments have been secured for virtually all of the pipeline’s capacity through 2019. At December 31, 2011, the
book value of our equity method investment in REX was $789 million.
Loans and Long-term Receivables
We enter into agreements with other parties to pursue business opportunities. Included in such activity are loans and long-term receivables to
certain affiliated and non-affiliated companies. Loans are recorded when cash is transferred or seller financing is provided to the affiliated or
non-affiliated company pursuant to a loan agreement. The loan balance will increase as interest is earned on the outstanding loan balance and
will decrease as interest and principal payments are received. Interest is earned at the loan agreement’s stated interest rate. Loans and long-term
receivables are assessed for impairment when events indicate the loan balance may not be fully recovered.
WRB Refining LP fully repaid its outstanding loans from us with payments of $550 million in 2011.
In November 2011, a long-term loan to a non-affiliated company related to seller financing of U.S. retail marketing assets sold in 2009 was
refinanced, resulting in a receipt of $365 million. The principal portion of this receipt was included in the “Other” line in the investing section
of the combined statement of cash flows. As part of the refinancing, we provided loan guarantees in support of $191 million of the total
refinancing.
Other
Merey Sweeny, L.P. (MSLP) owns a delayed coker and related facilities at the Sweeny Refinery. MSLP processes long residue, which is
produced from heavy sour crude oil, for a processing fee. Fuel-grade petroleum coke is produced as a by-product and becomes the property of
MSLP. Prior to August 28, 2009, MSLP was owned 50/50 by us and Petróleos de Venezuela S.A. (PDVSA). Under the agreements that govern
the relationships between the partners, certain defaults by PDVSA with respect to supply of crude oil to the Sweeny Refinery gave us the right
to acquire PDVSA’s 50 percent ownership interest in MSLP, which we exercised on August 28, 2009. PDVSA has initiated arbitration with the
International Chamber of Commerce challenging the exercise of the call right and claiming it was invalid. The arbitral tribunal is scheduled to
hold hearings on the merits of the dispute in December 2012. We continue to use the equity method of accounting for our investment in MSLP.
F-17
Table of Contents
Note 7—Properties, Plants and Equipment
Properties, plants and equipment (PP&E) are recorded at cost. In the R&M segment, investments in refining manufacturing facilities are
generally depreciated on a straight-line basis over a 25-year life, and pipeline assets over a 45-year life. The company’s investment in PP&E,
with the associated accumulated depreciation and amortization (Accum. D&A), at December 31 was:
Millions of Dollars
R&M
Refining
Transportation
Marketing and other
Total R&M
Midstream
Chemicals
Corporate and other
Gross
PP&E
2011
Accum.
D&A
Net
PP&E
Gross
PP&E
2010
Accum.
D&A
Net
PP&E
$ 19,400
2,359
1,319
6,651
931
745
12,749
1,428
574
20,884
2,412
1,257
7,554
890
713
13,330
1,522
544
23,078
8,327
14,751
24,553
9,157
15,396
64
14
51
7
13
7
61
2
49
1
12
1
$ 23,156
8,385
14,771
24,616
9,207
15,409
Note 8—Goodwill and Intangibles
Goodwill
Changes in the carrying amount of goodwill, which is entirely within the R&M segment, were as follows:
Balance at January 1
Goodwill allocated to assets sold
Tax and other adjustments
Millions of Dollars
2010
2011
3,638
$ 3,633
(273 )
(5 )
(28 )
Balance at December 31
$ 3,332
3,633
Intangible Assets
Information at December 31 on the carrying value of intangible assets follows:
Millions of Dollars
Gross Carrying
Amount
2011
Indefinite-Lived Intangible Assets
Trade names and trademarks
Refinery air and operating permits
F-18
2010
$
494
207
494
244
$
701
738
Table of Contents
At year-end 2011, our amortized intangible asset balance was $31 million, compared with $39 million at year-end 2010. Amortization
expense was not material for 2011 and 2010, and is not expected to be material in future years.
Note 9—Impairments
During 2011, 2010 and 2009, we recognized the following before-tax impairment charges:
Millions of Dollars
2010
2011
R&M
United States
International
2009
$
470
2
83
1,616
63
3
$
472
1,699
66
2011
In 2011, we recorded a $467 million impairment of our refinery and associated pipelines and terminals in Trainer, Pennsylvania. In September
2011, we announced plans to seek a buyer for the refinery and have idled the facility. If unable to sell the refinery, we expect to permanently
close the plant by the end of the first quarter of 2012.
2010
In U.S. R&M, we recorded property impairments of $83 million, which included canceled projects, a power generation facility and planned
asset dispositions. In International R&M, we recorded a $1,514 million impairment of our refinery in Wilhelmshaven, Germany, due to
canceled plans for a project to upgrade the refinery, and a $98 million impairment as a result of our decision to end our participation in a new
refinery project in Yanbu Industrial City, Saudi Arabia.
2009
In 2009, we recorded property impairments of $66 million, which were primarily associated with planned asset dispositions.
Fair Value Remeasurements
There were no material fair value impairments for the year ended December 31, 2011. The following table shows the values of assets, by major
category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition:
Fair Value*
Year ended December 31, 2010
Net properties, plants and equipment (held for use)
Net properties, plants and equipment (held for sale)
$
274
23
*Represents the fair value at the time of the impairment.
F-19
Millions of Dollars
Fair Value
Measurements Using
Level 1
Level 3
Inputs
Inputs
5
274
18
Before-Tax
Loss
1,508
43
Table of Contents
2010
During 2010, net properties, plants and equipment held for use with a carrying amount of $1,782 million were written down to a fair value of
$274 million, resulting in a before-tax loss of $1,508 million. The fair values were determined by the use of internal discounted cash flow
models using estimates of prices, costs and a discount rate believed to be consistent with those used by principal market participants and cash
flow multiples for similar assets and alternative use.
Also during 2010, net properties, plants and equipment held for sale with a carrying amount of $64 million were written down to their fair
value of $23 million less cost to sell of $2 million for a net $21 million, resulting in a before-tax loss of $43 million. The fair values were
primarily determined by binding negotiated selling prices with third parties, with some adjusted for the fair value of certain liabilities retained.
Note 10—Asset Retirement Obligations and Accrued Environmental Costs
Asset retirement obligations and accrued environmental costs at December 31 were:
Asset retirement obligations
Accrued environmental costs
$
Total asset retirement obligations and accrued environmental costs
Asset retirement obligations and accrued environmental costs due within one year*
Long-term asset retirement obligations and accrued environmental costs
$
Millions of Dollars
2011
378
542
2010
332
554
920
(133 )
886
(84 )
787
802
*Classified as a current liability on the balance sheet, under the caption “Other accruals.”
Asset Retirement Obligations
We record the fair value of a liability for an asset retirement obligation when it is incurred (typically when the asset is installed). When the
liability is initially recorded, we capitalize the associated asset retirement cost by increasing the carrying amount of the related properties,
plants and equipment. Over time, the liability increases for the change in its present value, while the capitalized cost depreciates over the useful
life of the related asset.
We have asset removal obligations that we are required to perform under law or contract once an asset is permanently taken out of service.
Most of these obligations are not expected to be paid until several years in the future and will be funded from general company resources at the
time of removal. Our largest individual obligations involve asbestos abatement at refineries.
During 2011 and 2010, our overall asset retirement obligation changed as follows:
Balance at January 1
Accretion of discount
New obligations
Changes in estimates of existing obligations
Spending on existing obligations
Property dispositions
Foreign currency translation
$
Balance at December 31
$
F-20
Millions of Dollars
2011
332
15
3
52
(20 )
(2 )
(2 )
378
2010
325
15
25
(20 )
(7 )
(6 )
332
Table of Contents
Accrued Environmental Costs
We had accrued environmental costs of $276 million and $290 million at December 31, 2011 and 2010, respectively, primarily related to
cleanup at domestic refineries and underground storage tanks at U.S. service stations; $206 million and $188 million, respectively, of
environmental costs associated with nonoperator sites; and $60 million and $76 million, respectively, where the company has been named a
potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act, or similar state laws.
Accrued environmental liabilities are expected to be paid over periods extending up to 30 years. Because a large portion of the accrued
environmental costs were acquired in various business combinations, they are discounted obligations. Expected expenditures for acquired
environmental obligations are discounted using a weighted-average 5 percent discount factor, resulting in an accrued balance for acquired
environmental liabilities of $276 million at December 31, 2011. The expected future undiscounted payments related to the portion of the
accrued environmental costs that have been discounted are: $22 million in 2012, $25 million in 2013, $16 million in 2014, $10 million in 2015,
$13 million in 2016, and $263 million for all future years after 2016.
Note 11—Debt
Long-term debt at December 31 was:
7.68% Notes due 2012
Industrial Development Bonds due 2012 through 2038 at 0.08%–5.75% at year-end 2011 and
0.33%–5.75% at year-end 2010
Note payable to Merey Sweeny, L.P. due 2020 at 7% (related party)
Other
$
Millions of Dollars
2011
7
2010
15
234
134
1
234
144
1
Debt at face value
Capitalized leases
Net unamortized premiums and discounts
376
14
1
394
22
1
Total debt
Short-term debt
391
(30 )
417
(29 )
361
388
Long-term debt
$
Maturities of long-term borrowings, inclusive of net unamortized premiums and discounts, in 2012 through 2016 are: $30 million, $13 million,
$14 million, $15 million and $16 million, respectively.
Note 12—Guarantees
At December 31, 2011, we were liable for certain contingent obligations under various contractual arrangements as described below. We
recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the
carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to
December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated we are not currently
performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of
occurrence.
F-21
Table of Contents
Guarantees of Joint Venture Debt
At December 31, 2011, we had guarantees outstanding for our portion of certain joint venture debt obligations, which have terms of up to 14
years. The maximum potential amount of future payments under the guarantees is approximately $50 million. Payment would be required if a
joint venture defaults on its debt obligations.
Other Guarantees
We have other guarantees with maximum future potential payment amounts totaling $190 million, which consist primarily of guarantees to
fund the short-term cash liquidity deficits of certain joint ventures and guarantees of the lease payment obligations of a joint venture. These
guarantees generally extend up to 13 years or life of the venture.
Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave
rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, environmental liabilities,
permits and licenses, employee claims, real estate indemnity against tenant defaults, and litigation. The terms of these indemnifications vary
greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite, and the maximum amount
of future payments is generally unlimited. The carrying amount recorded for these indemnifications at December 31, 2011, was $278 million.
We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each
type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is
essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines.
Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to
make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount were $157 million
of environmental accruals for known contamination that are included in asset retirement obligations and accrued environmental costs at
December 31, 2011. For additional information about environmental liabilities, see Note 13—Contingencies and Commitments.
Note 13—Contingencies and Commitments
A number of lawsuits involving a variety of claims have been made against us that arise in the ordinary course of business. We also may be
required 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 active and inactive sites. We regularly assess the need for accounting recognition or disclosure of these
contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable
and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate
than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party
recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related
contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain. See Note
17—Income Taxes, for additional information about income-tax-related contingencies.
Based on currently available information, we believe 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 our combined financial statements. As we learn new facts
concerning contingencies, we reassess
F-22
Table of Contents
our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes 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 uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that
may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax
and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and
litigation processes.
Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare our combined financial
statements, we record accruals for environmental liabilities based on management’s best estimates, using all information that is available at the
time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations,
taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience
in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency
(EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the
period they are both probable and reasonably estimable.
Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and
frequently so for state sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we
could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been
successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible
are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess
the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may
attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional
share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions
in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by
others for our benefit and some of the indemnifications are subject to dollar limits and time limits.
We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an
assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those acquired in a
purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is
probable future costs will be incurred and these costs can be reasonably estimated. We have not reduced these accruals for possible insurance
recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings. See Note 10—Asset
Retirement Obligations and Accrued Environmental Costs, for a summary of our accrued environmental liabilities.
Legal Proceedings
Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a
litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and
quantification of potential exposures in individual cases. This process also enables us to track those cases that have been scheduled for trial
and/or mediation. Based on professional judgment and experience in using these litigation management tools
F-23
Table of Contents
and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current
accruals and determines if adjustment of existing accruals, or establishment of new accruals, are required.
Other Contingencies
We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing
arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties
for fees related to throughput capacity not utilized. In addition, at December 31, 2011, we had performance obligations secured by letters of
credit of $1,233 million (of which $40 million was issued under the provisions of our parent company’s revolving credit facility, and the
remainder was issued as direct bank letters of credit) related to various purchase commitments for materials, supplies, services and items of
permanent investment incident to the ordinary conduct of business.
Long-Term Throughput Agreements and Take-or-Pay Agreements
We have certain throughput agreements and take-or-pay agreements in support of financing arrangements. The agreements typically provide
for crude oil transportation to be used in the ordinary course of the company’s business. The aggregate amounts of estimated payments under
these various agreements are: 2012—$337 million; 2013—$336 million; 2014—$336 million; 2015—$336 million; 2016—$336 million; and
2017 and after—$4,699 million. Total payments under the agreements were $300 million in 2011, $96 million in 2010 and $2 million in 2009.
Note 14—Financial Instruments and Derivative Contracts
Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in foreign currency exchange rates and
commodity prices, or to capture market opportunities. Since we are not currently using cash-flow hedge accounting, all gains and losses,
realized or unrealized, from derivative contracts have been recognized in the combined statement of income. Gains and losses from derivative
contracts held for trading not directly related to our physical business, whether realized or unrealized, have been reported net in “Other income”
in our combined statement of income.
Purchase and sales contracts with fixed minimum notional volumes for commodities that are readily convertible to cash (e.g., crude oil and
gasoline) are recorded on the balance sheet as derivatives unless the contracts are eligible for and we elect the normal purchases and normal
sales exception (i.e., contracts to purchase or sell quantities we expect to use or sell over a reasonable period in the normal course of business).
We generally apply this normal purchases and normal sales exception to eligible crude oil, refined product, natural gas and power commodity
purchase and sales contracts; however, we may elect not to apply this exception (e.g., when another derivative instrument will be used to
mitigate the risk of the purchase or sales contract but hedge accounting will not be applied, in which case both the purchase or sales contract
and the derivative contract mitigating the resulting risk will be recorded on the balance sheet at fair value).
We value our exchange-traded derivatives using closing prices provided by the exchange as of the balance sheet date, and these are classified
as Level 1 in the fair value hierarchy. Where exchange-provided prices are adjusted, non-exchange quotes are used or when the instrument
lacks sufficient liquidity, we generally classify those exchange-cleared contracts as Level 2. Over-the-counter (OTC) financial swaps and
physical commodity forward purchase and sales contracts are generally valued using quotations provided by brokers
F-24
Table of Contents
and price index developers such as Platts and Oil Price Information Service. These quotes are corroborated with market data and are classified
as Level 2. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC
swaps and physical commodity purchase and sales contracts are valued using internally developed methodologies that consider historical
relationships among various commodities that result in management’s best estimate of fair value. These contracts are classified as Level 3. A
contract that is initially classified as Level 3 due to absence or insufficient corroboration of broker quotes over a material portion of the contract
will transfer to Level 2 when the portion of the trade having no quotes or insufficient corroboration becomes an insignificant portion of the
contract. A contract would also transfer to Level 2 if we began using a corroborated broker quote that has become available. Conversely, if a
corroborated broker quote ceases to be available or used by us, the contract would transfer from Level 2 to Level 3. There were no material
transfers in or out of Level 1.
Financial OTC and physical commodity options are valued using industry-standard models that consider various assumptions, including quoted
forward prices for commodities, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant
economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as
Level 2 or 3.
We use a mid-market pricing convention (the mid-point between bid and ask prices). When appropriate, valuations are adjusted to reflect credit
considerations, generally based on available market evidence.
The fair value hierarchy for our derivative assets and liabilities accounted for at fair value on a recurring basis was:
Millions of Dollars
Level 1
Assets
Commodity
derivatives
$
Liabilities
Commodity
derivatives
Net assets
(liabilities)
$
December 31, 2011
Level 2
Level 3
Total
Level 1
December 31, 2010
Level 2
Level 3
Total
389
270
6
665
685
520
7
1,212
428
267
4
699
779
567
10
1,356
3
2
(34 )
(94 )
(47 )
(3 )
(39 )
(144 )
The derivative values above are based on analysis of each contract as the fundamental unit of account; therefore, derivative assets and liabilities
with the same counterparty are not reflected net where the legal right of setoff exists. Gains or losses from contracts in one level may be offset
by gains or losses on contracts in another level or by changes in values of physical contracts or positions that are not reflected in the table
above.
As reflected in the table above, Level 3 activity was not material.
Commodity Derivative Contracts —We operate in the worldwide crude oil, refined product, natural gas, natural gas liquids and electric
power markets and are exposed to fluctuations in the prices for these commodities. These fluctuations can affect our revenues, as well as the
cost of operating, investing and financing activities. Generally, our policy is to remain exposed to the market prices of commodities; however,
we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on
specific transactions, and do a limited, immaterial amount of
F-25
Table of Contents
trading not directly related to our physical business. We also use the market knowledge gained from these activities to capture market
opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums,
and blending commodities to capture quality upgrades. Derivatives may be used to optimize these activities which may move our risk profile
away from market average prices.
The fair value of commodity derivative assets and liabilities and the line items where they appear on our combined balance sheet were:
Millions of Dollars
Assets
Prepaid expenses and other current assets
Other assets
Liabilities
Other accruals
Other liabilities and deferred credits
$
2011
2010
665
5
1,225
-
703
1
1,369
-
Hedge accounting has not been used for any item in the table. The amounts shown are presented gross (i.e., without netting assets and liabilities with the same counterparty where the right of
setoff exists).
The gains (losses) from commodity derivatives incurred, and the line items where they appear on our combined statement of income were:
Millions of Dollars
Sales and other operating revenues
Other income
Purchased crude oil and products
$
2011
2010
(620 )
12
162
(257 )
(33 )
151
Hedge accounting has not been used for any item in the table.
The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and
physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from
non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as
forward sales contracts.
Open Position
Long / (Short)
2011
Commodity
Crude oil, refined products and natural gas liquids (millions of barrels)
(13 )
2010
(16 )
Credit Risk
Financial instruments potentially exposed to concentrations of credit risk consist primarily of OTC derivative contracts and trade receivables.
F-26
Table of Contents
The credit risk from our OTC derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual
counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby
reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these
trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the
credit risk of those exchange brokers for the receivables arising from daily margin cash calls, as well as for cash deposited to meet initial
margin requirements.
Our trade receivables result primarily from the sale of products from, or related to, our refinery operations and reflect a broad national and
international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of
30 days or less. We continually monitor this exposure and the creditworthiness of the counterparties and recognize bad debt expense based on
historical write-off experience or specific counterparty collectability. Generally, we do not require collateral to limit the exposure to loss;
however, we will sometimes use letters of credit, prepayments, and master netting arrangements to mitigate credit risk with counterparties that
both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due us.
Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount.
We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating.
The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert
to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many contracts also permit us to post letters
of credit as collateral.
The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that were in a liability position was not
material at December 31, 2011.
Fair Values of Financial Instruments
We used the following methods and assumptions to estimate the fair value of financial instruments:
•
•
•
•
•
Accounts and notes receivable: The carrying amount reported on the balance sheet approximates fair value.
Debt: The carrying amount of our floating-rate debt approximates fair value. The fair value of the fixed-rate debt is estimated
based on quoted market prices.
Commodity swaps: Fair value is estimated based on forward market prices and approximates the exit price at period end. When
forward market prices are not available, fair value is estimated using the forward prices of a similar commodity with adjustments
for differences in quality or location.
Futures: Fair values are based on quoted market prices obtained from the New York Mercantile Exchange, the
IntercontinentalExchange Futures, or other traded exchanges.
Forward-exchange contracts: Fair values are estimated by comparing the contract rate to the forward rates in effect at the end of
the respective reporting periods, and approximate the exit price at those dates.
F-27
Table of Contents
Our commodity derivative and financial instruments were:
Millions of Dollars
Carrying Amount
Financial assets
Commodity derivatives
Financial liabilities
Commodity derivatives
Total debt, excluding capital leases
$
Fair Value
2011
2010
2011
2010
73
81
73
81
52
377
73
395
52
406
73
428
The amounts shown for derivatives in the preceding table are presented net (i.e., assets and liabilities with the same counterparty are netted
where the right of setoff exists). In addition, the 2011 commodity derivative assets and liabilities appear net of $55 million of rights to reclaim
cash collateral. The 2010 commodity derivative assets and liabilities appear net of $152 million of rights to reclaim cash collateral.
Note 15—Leases
The company leases ocean transport vessels, tugboats, barges, pipelines, railcars, service station land sites, computers, office buildings and
other facilities and equipment. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices, as well
as renewal options and/or options to purchase the leased property for the fair market value at the end of the lease term. There are no significant
restrictions imposed on us by the leasing agreements with regard to dividends, asset dispositions or borrowing ability. Leased assets under
capital leases were not significant in any period presented.
At December 31, 2011, future minimum rental payments due under noncancelable leases were:
2012
2013
2014
2015
2016
Remaining years
$
Total
Less income from subleases
Millions of Dollars
426
318
240
206
121
435
1,746
105 *
Net minimum operating lease payments
$
*Includes $64 million related to subleases to related parties.
F-28
1,641
Table of Contents
Operating lease rental expense for the years ended December 31 was:
Total rentals*
Less sublease rentals
$
2011
581
19
$
562
Millions of Dollars
2010
658
20
2009
762
15
638
747
*Includes $5 million of contingent rentals in 2011, and $6 million in 2010 and 2009. Contingent rentals primarily are related to retail marketing assets and are based on volume of
product sold.
Note 16—Employee Benefit Plans
Pension Plans
As described in Note 2—Accounting Policies, we have plans in Austria, Germany and Ireland sponsored by entities included in Phillips 66,
which are accounted for as defined benefit pension plans. An analysis of the projected benefit obligations for these pension plans follows:
Millions of Dollars
2011
Change in Benefit Obligation
Benefit obligation at January 1
Service cost
Interest cost
Plan participant contributions
Actuarial loss
Benefits paid
Foreign currency exchange rate change
2010
$
230
5
13
1
(10 )
(2 )
218
5
12
1
11
(9 )
(8 )
Benefit obligation at December 31*
$
237
230
*Accumulated benefit obligation portion of above at December 31:
$
206
200
$
119
(3 )
12
1
(10 )
1
109
9
11
1
(9 )
(2 )
Fair value of plan assets at December 31
$
120
119
Funded Status
$
(117 )
(111 )
Change in Fair Value of Plan Assets
Fair value of plan assets at January 1
Actual return on plan assets
Company contributions
Plan participant contributions
Benefits paid
Foreign currency exchange rate change
F-29
Table of Contents
Millions of Dollars
2011
Amounts Recognized in the Combined Balance Sheet at December 31
Noncurrent liabilities
$
(111 )
(117 )
Weighted-Average Assumptions Used to Determine Benefit Obligations at
December 31
Discount rate
2010
%
5.40
2.60
5.30
2.60
Rate of compensation increase
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost for
Years ended December 31
Discount rate
%
5.60
5.60
2.70
5.40
5.80
2.60
Expected return on plan assets
Rate of compensation increase
The overall expected long-term rate of return is developed from the expected future return of each asset class, weighted by the expected
allocation of pension assets to that asset class. We rely on a variety of independent market forecasts in developing the expected rate of return
for each class of assets.
Included in accumulated other comprehensive income at December 31 were the following before-tax amounts that had not been recognized in
net periodic benefit cost:
Unrecognized net actuarial loss
$
Millions of Dollars
2011
36
2010
31
Accumulated other comprehensive income at December 31, 2011, includes $4 million that is expected to be amortized into net periodic benefit
cost during 2012.
For our tax-qualified pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation, the accumulated
benefit obligation, and the fair value of plan assets were $237 million, $206 million, and $120 million, respectively, at December 31, 2011, and
$230 million, $200 million, and $119 million, respectively, at December 31, 2010.
The components of net periodic benefit cost of all defined benefit plans are presented in the following table:
2011
Components of Net Periodic Benefit Cost
Service cost
Interest cost
Expected return on plan assets
Recognized net actuarial loss
Net periodic benefit cost
2009
$
5
13
(8 )
3
5
12
(6 )
2
5
12
(6 )
3
$
13
13
14
For net actuarial gains and losses, we amortize 10 percent of the unamortized balance each year.
F-30
Millions of Dollars
2010
Table of Contents
Plan Assets— The investment strategy for managing pension plan assets is to seek a reasonable rate of return relative to an appropriate level of
risk and provide adequate liquidity for benefit payments and portfolio management. We follow a policy of diversifying plan assets across asset
classes, investment managers, and individual holdings. A portion of plan assets are concentrated in contracts or securities from a few key
issuers: approximately 13 percent are invested with a single insurance company, approximately 11 percent are invested in Italian government
bonds, and approximately 11 percent are invested in French government bonds. Asset classes that are considered appropriate include equities,
fixed income, cash, real estate and insurance contracts. Plan fiduciaries may consider and add other asset classes to the investment program
from time to time. The target allocations for plan assets are approximately 46 percent equity securities, 35 percent debt securities and
19 percent in all other types of investments.
The following is a description of the valuation methodologies used for the pension plan assets. There have been no changes in the
methodologies used at December 31, 2011 and 2010.
•
•
•
•
•
Fair values of investments in common/collective trusts are determined by the issuer of each fund based on the fair value of the
underlying assets.
Fair values of mutual funds are valued based on quoted market prices, which represent the net asset value of shares held.
Cash is valued at cost, which approximates fair value.
Fair values of insurance contracts are valued at the present value of the future benefit payments owed by the insurance company
to the Plans’ participants.
Fair values of real estate investments are valued using real estate valuation techniques and other methods that include reference to
third-party sources and sales comparables where available.
The fair values of our pension plan assets at December 31, by asset class were as follows:
Level 1
2011
Equity Securities
Common/collective trusts
Debt Securities
Common/collective trusts
Cash
Insurance contracts
Real estate
Total
2010
Equity Securities
Common/collective trusts
Debt Securities
Common/collective trusts
Insurance contracts
Real estate
Total
$
Millions of Dollars
Level 2
Level 3
Total
-
56
-
56
2
-
42
-
15
5
42
2
15
5
$
2
98
20
120
$
-
61
-
61
-
39
-
16
3
39
16
3
-
100
19
119
$
As reflected in the table above, Level 3 activity was not material.
F-31
Table of Contents
Contributions to international plans are dependent upon local laws and tax regulations. In 2012, we expect to contribute approximately
$13 million to our international qualified pension plans.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
2012
2013
2014
2015
2016
2017-2020
$
Millions of
Dollars
9
10
10
11
11
64
Shared Pension and Postretirement Plans
Certain U.S. and U.K. employees participate in defined benefit pension plans and certain U.S. employees participate in postretirement health
and life insurance plans sponsored by ConocoPhillips, which include participants of other ConocoPhillips subsidiaries. We recorded expense of
$199 million, $234 million, and $259 million for 2011, 2010, and 2009, respectively, for our allocation of U.S. pension costs. We recorded
expense of $39 million, $47 million, and $37 million for 2011, 2010, and 2009, respectively, for our allocation of U.K. pension costs. We
recorded expense of $19 million, $26 million, and $23 million for 2011, 2010, and 2009, respectively, for our allocation of U.S. postretirement
costs. As of December 31, 2011 and 2010, there were no required contributions outstanding.
At December 31, 2011 and 2010, the shared defined benefit pension plans were approximately 70 percent and 72 percent funded, respectively.
Contributions to the plans are made by ConocoPhillips and are at least sufficient to meet the minimum funding requirements of applicable laws
and regulations but no more than the amount deductible for federal income tax purposes. The assets of the plans are held by major financial
institutions and are well diversified and include investments in domestic equities, international equities, fixed income, private equity, real
estate, and cash.
Defined Contribution Plans
Most U.S. employees are eligible to participate in the ConocoPhillips Savings Plan (CPSP). Employees can deposit up to 75 percent of their
eligible pay up to the statutory limit ($16,500 in 2011) in the thrift feature of the CPSP to a choice of approximately 39 investment funds.
ConocoPhillips matches contribution deposits, up to 1.25 percent of eligible pay. Contributions charged to expense for the CPSP and
predecessor plans for Phillips 66 employees, excluding the stock savings feature (discussed below), were $13 million in 2011, 2010 and 2009.
The stock savings feature of the CPSP is a leveraged employee stock ownership plan. Employees may elect to participate in the stock savings
feature by contributing 1 percent of eligible pay and receiving an allocation of ConocoPhillips shares of common stock proportionate to the
amount of contribution. Total CPSP expense related to the participation of Phillips 66 employees in this stock savings feature was $38 million,
$45 million and $44 million in 2011, 2010 and 2009, respectively, all of which was compensation expense.
F-32
Table of Contents
Share-Based Compensation Plans
Until the completion of the separation of Phillips 66 from ConocoPhillips, Phillips 66 employees will continue to participate in the
ConocoPhillips share-based compensation plans. Total share-based compensation expense directly allocated to Phillips 66 and the associated
tax benefits for the years ended December 31, were as follows:
Millions of Dollars
2010
2011
44
$
46
17
18
Compensation cost
Tax benefit
2009
39
15
ConocoPhillips share-based compensation programs generally provide accelerated vesting (i.e., a waiver of the remaining period of service
required to earn an award) for awards held by employees at the time of their retirement. For share-based awards granted prior to
ConocoPhillips’ adoption of Statement of Financial Accounting Standards No. 123(R), codified into FASB ASC Topic 718,
“Compensation—Stock Compensation,” ConocoPhillips recognized expense over the time that an employee earned the award, even if the
award could not be forfeited due to retirement eligibility. Expense recognition would only be accelerated if the employee actually retired.
Share-based compensation expense for awards granted after ConocoPhillips adopted ASC 718 on January 1, 2006, is recognized over the
shorter of: (1) the service period (i.e., the stated period of time required to earn the award); or (2) the period beginning at the start of the service
period and ending when an employee first becomes eligible for retirement, but not less than six months, which is the minimum time required
for an award to not be subject to forfeiture.
Some of ConocoPhillips’ share-based awards vest ratably (i.e., portions of the award vest at different times) while some of the awards cliff vest
(i.e., all of the award vests at the same time). For awards that vest ratably granted prior to ConocoPhillips’ adoption of ASC 718, expense is
recognized on a straight-line basis over the service period for each portion of the award vesting separately (i.e., as if the one award was actually
multiple awards with different requisite service periods). For share-based awards granted after adoption of ASC 718, ConocoPhillips
recognizes expense on a straight-line basis over the service period for the entire award, whether the award was granted with ratable or cliff
vesting.
Basis of Presentation— The following sections on ConocoPhillips stock options, Stock Unit Program, and Performance Share Program
disclose the activity of these awards granted to direct active employees of Phillips 66. Awards to indirect employees of Phillips 66 (e.g., awards
to ConocoPhillips corporate staffs that provide services to Phillips 66) are excluded from the following disclosures, as the expense of those
awards was either: (1) included in expense allocated to Phillips 66 for certain corporate functions historically performed by ConocoPhillips,
through a multi-tiered allocation process in which the individual cost components may or may not be discretely identifiable; or (2) retained at
corporate historically but have been allocated to Phillips 66 for the sole purpose of presenting these financial statements (for more information,
see Note 1—Separation and Basis of Presentation).
The tables that appear in the following sections display the net change of awards held by employees transferring in and out of Phillips 66
during the year in the line “Transfers in/(out).” This line also includes reductions for awards held by Phillips 66 employees who retired or left
the company during the year and ceased being direct active employees.
Stock Options— Stock options granted under the provisions of the 2009 Omnibus Stock and Performance Incentive Plan of ConocoPhillips
(the Plan) and earlier plans permit purchases of ConocoPhillips common stock at exercise prices equivalent to the average market price of the
stock on the date the options were granted. The options have terms of 10 years and generally vest ratably, with one-third of an option award
F-33
Table of Contents
vesting and becoming exercisable on each anniversary date following its date of grant. Options awarded to employees already eligible for
retirement vest within six months of the grant date, but those options do not become exercisable until the end of the normal vesting period.
The following table summarizes the activity of ConocoPhillips stock options granted to direct active employees of Phillips 66 for the three
years ended December 31, 2011:
WeightedAverage
Exercise Price
Options
Outstanding at December 31, 2008
Granted
Exercised
Forfeited
Expired or canceled
Transfers in/(out)
4,652,169
644,200
(220,792 )
(418,942 )
$
34.11
45.47
22.04
26.41
Outstanding at December 31, 2009
Granted
Exercised
Forfeited
Expired or canceled
Transfers in/(out)
4,656,635
491,200
(676,930 )
(765,257 )
$
Outstanding at December 31, 2010
Granted
Exercised
Forfeited
Expired or canceled
Transfers in/(out)
3,705,648
359,500
(756,200 )
(2,282 )
(434,824 )
$
Outstanding at December 31, 2011
2,871,842
$
45.07
Vested at December 31, 2011
2,385,467
$
Exercisable at December 31, 2011
2,083,828
$
Weighted-Average
Grant-Date
Fair Value
$
Millions of Dollars
Aggregate
Intrinsic Value
11.18
$
6
$
20
$
32
42.56
$
74
40.27
$
69
36.95
48.39
27.16
41.87
39.23
70.13
30.55
27.85
41.40
$
$
11.70
16.70
The weighted-average remaining contractual term of vested options and exercisable options at December 31, 2011, was 3.97 years and 3.31
years, respectively.
During 2011, ConocoPhillips received $22 million in cash and realized a tax benefit of $8 million from the exercise of options held by direct
active employees of Phillips 66. At December 31, 2011, the remaining unrecognized compensation expense from unvested options was $3
million, which will be recognized over a weighted-average period of 19 months, the longest period being 25 months.
F-34
Table of Contents
The significant assumptions used to calculate the fair market values of ConocoPhillips options granted over the past three years, as calculated
using the Black-Scholes-Merton option-pricing model, were as follows:
2010
2011
Assumptions used
Risk-free interest rate
2009
%
3.10
Dividend yield
3.23
2.90
4.00
3.50
33.80
6.65
32.90
6.53
%
4.00
Volatility factor
%
33.40
6.87
Expected life (years)
The ranges in the assumptions used were as follows:
2011
High
Ranges used
Risk-free interest rate
Dividend yield
Volatility factor
2010
2009
Low
High
Low
High
Low
3.10
4.00
33.40
3.23
4.00
33.80
3.23
4.00
33.80
2.90
3.50
32.90
2.90
3.50
32.90
%
3.10
4.00
33.40
Volatility was calculated using the most recent ConocoPhillips end-of-week closing stock prices spanning a period equal to the expected life of
the options granted. The average of the time lapsed between grant dates and exercise dates of past grants is periodically calculated to estimate
the expected life of new option grants.
Upon completion of the separation, the disposition of ConocoPhillips outstanding stock options held by Phillips 66 employees on the
distribution date depends on whether the options are exercisable. Each holder of exercisable ConocoPhillips stock options will retain the
options and also receive exercisable options of Phillips 66 entitling the holder to purchase the same number of shares of Phillips 66 common
stock the holder would have been entitled to receive if he or she had exercised the ConocoPhillips stock options immediately prior to the
distribution record date. The exercise prices of both the existing ConocoPhillips options and the new options in Phillips 66 will be adjusted
using a formula designed generally to preserve the intrinsic value of the original ConocoPhillips stock options prior to the separation.
Unexercisable ConocoPhillips stock options held by Phillips 66 employees at the separation will be replaced by unexercisable stock options to
purchase shares of Phillips 66, with the same terms and conditions as the options replaced, but the exercise price and the number of shares
subject to the Phillips 66 options will be adjusted using a formula designed generally to preserve the intrinsic value of the original
ConocoPhillips stock options prior to the separation.
Stock Unit Program— Stock units granted under the provisions of the Plan vest ratably, with one-third of the units vesting in 36 months,
one-third vesting in 48 months, and the final third vesting 60 months from the date of grant. Upon vesting, the units are settled by issuing one
share of ConocoPhillips common stock per unit. Units awarded to employees already eligible for retirement vest within six months of the grant
date, but those units are not issued as shares until the end of the normal vesting period. Until issued as stock, most recipients of the units
receive a quarterly cash payment of a dividend equivalent that is charged to expense. The grant date fair value of these units is deemed equal to
the average ConocoPhillips common stock price on the date of grant. The grant date fair market value of units that do not receive a dividend
equivalent while unvested is deemed equal to the average ConocoPhillips common stock price on the grant date, less the net present value of
the dividends that will not be received.
F-35
Table of Contents
The following summarizes the activity of ConocoPhillips stock units granted to direct active employees of Phillips 66 for the three years ended
December 31, 2011:
Weighted-Average
Grant-Date Fair Valu
e
Stock Units
Outstanding at December 31, 2008
Granted
Forfeited
Issued
Transfers in/(out)
1,481,090
613,348
(396,234 )
(120,246 )
$
Outstanding at December 31, 2009
Granted
Forfeited
Issued
Transfers in/(out)
1,577,958
612,648
(324,786 )
(82,945 )
$
Outstanding at December 31, 2010
Granted
Forfeited
Issued
Transfers in/(out)
1,782,875
432,957
(282,238 )
(124,111 )
$
Outstanding at December 31, 2011
1,809,483
$
56.11
Not Vested at December 31, 2011
1,266,093
$
56.34
Millions of Dollars
Total Fair Value
60.26
44.91
$
18
$
16
$
20
59.07
58.22
47.87
59.09
55.21
69.52
55.34
At December 31, 2011, the remaining unrecognized compensation cost from the unvested units held by direct active employees of Phillips 66
was $36 million, which will be recognized over a weighted-average period of 33 months, the longest period being 52 months.
Upon completion of the separation, ConocoPhillips stock units under this Plan held by Phillips 66 employees will be replaced by stock units of
Phillips 66 with the same terms and conditions as the original stock units, but the number of Phillips 66 stock units will be adjusted using a
formula generally designed to preserve the intrinsic value of the original stock units prior to the separation.
Performance Share Program— Under the Plan, ConocoPhillips also annually grants to senior management performance stock units (PSUs)
that do not vest until either: (1) with respect to awards for periods beginning before 2009, the employee becomes eligible for retirement by
reaching age 55 with five years of service; or (2) with respect to awards for periods beginning in 2009, five years after the grant date of the
award (although recipients can elect to defer the lapsing of restrictions until retirement after reaching age 55 with five years of service).
Accordingly, compensation expense is recognized for these awards beginning on the date of grant and ending on the date the PSUs are
scheduled to vest. Since these awards are authorized three years prior to the grant date, compensation expense for employees eligible for
retirement by or shortly after the grant date is recognized over the period beginning on the date of authorization and ending on the date of grant.
These PSUs are settled by issuing one share of ConocoPhillips common stock per PSU. Until issued as stock, recipients of the PSUs receive a
quarterly cash payment of a dividend equivalent that is charged to expense. In its current form, the first grant of PSUs under this program was
in 2006.
F-36
Table of Contents
The following summarizes the activity for ConocoPhillips PSUs granted to direct active employees of Phillips 66 for the three years ended
December 31, 2011:
Performance
Share Stock Un
its
Weighted-Average
Grant-Date Fair Value
Millions of Dollars
Total Fair Value
Outstanding at December 31, 2008
Granted
Forfeited
Issued
Transfers in/(out)
475,682
91,787
(10,507 )
$
68.48
45.47
-
Outstanding at December 31, 2009
Granted
Forfeited
Issued
Transfers in/(out)
556,962
40,706
(132,195 )
$
Outstanding at December 31, 2010
Granted
Forfeited
Issued
Transfers in/(out)
465,473
84,515
(67,593 )
$
Outstanding at
December 31, 2011
482,395
$
64.39
Not Vested at December 31, 2011
295,926
$
64.42
$
-
$
-
$
-
64.47
64.77
48.39
65.06
63.25
70.13
63.69
At December 31, 2011, the remaining unrecognized compensation cost from unvested PSU awards held by direct active employees of
Phillips 66 was $7 million, which will be recognized over a weighted-average period of 41 months, the longest period being 15 years.
Upon completion of the separation, each holder of ConocoPhillips PSUs under this Plan will retain those PSUs and receive PSUs of Phillips 66
in an amount equal to what the holder would have been entitled to receive if the ConocoPhillips PSUs had been settled with ConocoPhillips
stock immediately prior to the distribution record date.
Note 17—Income Taxes
Our income taxes as presented are calculated on a standalone basis.
Income taxes charged to income were:
2011
Income Taxes
Federal
Current
Deferred
Foreign
Current
Deferred
State and local
Current
Deferred
$
$
F-37
Millions of Dollars
2010
2009
733
746
335
484
373
(73 )
126
(9 )
180
(489 )
218
(165 )
133
115
54
15
10
5
1,844
579
368
Table of Contents
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were:
Deferred Tax Liabilities
Properties, plants and equipment, and intangibles
Investment in joint ventures
Investments in foreign subsidiaries
Other
$
Total deferred tax liabilities
Deferred Tax Assets
Benefit plan accruals
Inventory
Asset retirement obligations and accrued environmental costs
Deferred state income tax
Other financial accruals and deferrals
Loss and credit carryforwards
Other
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
Net deferred tax liabilities
$
Millions of Dollars
2011
2010
3,480
2,336
647
112
3,422
1,684
592
130
6,575
5,828
45
70
266
233
128
364
5
59
268
195
121
571
1
1,111
(210 )
1,215
(165 )
901
1,050
5,674
4,778
Current assets, long-term assets, current liabilities and long-term liabilities included deferred taxes of $171 million, $9 million, $51 million and
$5,803 million, respectively, at December 31, 2011, and $131 million, $13 million, $105 million and $4,817 million, respectively, at
December 31, 2010.
With the exception of certain separate company losses, we did not allocate tax attributes to Phillips 66 at the beginning of the earliest period
presented. At the balance sheet dates presented in this footnote, we have credit and loss carryforwards in multiple taxing jurisdictions. These
attributes generally have indefinite carryforward periods.
Valuation allowances have been established to reduce deferred tax assets to an amount that will, more likely than not, be realized. During 2011,
valuation allowances increased a total of $45 million. This increase is primarily related to foreign loss carryforwards. Based on our historical
taxable income, expectations for the future, and available tax-planning strategies, management expects remaining net deferred tax assets will be
realized as offsets to reversing deferred tax liabilities and as offsets to the tax consequences of future taxable income.
At December 31, 2011 and 2010, income considered to be permanently reinvested in certain foreign subsidiaries and foreign corporate joint
ventures totaled approximately $1,081 million and $904 million, respectively. Deferred income taxes have not been provided on this income, as
we do not plan to initiate any action that would require the payment of income taxes. It is not practicable to estimate the amount of additional
tax that might be payable on this foreign income if distributed.
F-38
Table of Contents
The following table shows a reconciliation of the beginning and ending unrecognized tax benefits for 2011, 2010 and 2009:
Millions of Dollars
2010
2011
2009
Balance at January 1
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapse of statute
$ 166
11
27
(32 )
(2 )
(1 )
178
11
88
(46 )
(65 )
-
171
11
8
(2 )
(8 )
(2 )
Balance at December 31
$ 169
166
178
Included in the balance of unrecognized tax benefits for 2011, 2010 and 2009 were $114 million, $122 million and $54 million, respectively,
which, if recognized, would affect our effective tax rate.
At December 31, 2011, 2010 and 2009, accrued liabilities for interest and penalties totaled $9 million, $16 million and $39 million,
respectively, net of accrued income taxes. Interest and penalties benefitted earnings by $7 million, $6 million and $4 million in 2011, 2010 and
2009, respectively.
We and ConocoPhillips file tax returns in the U.S. federal jurisdiction and in many foreign and state jurisdictions. Audits in major jurisdictions
are generally complete as follows: United Kingdom (2008), Germany (2006) and United States (2006). Issues in dispute for audited years and
audits for subsequent years are ongoing and in various stages of completion in the many jurisdictions in which we operate around the world. As
a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. It is reasonably possible such
changes could be significant when compared with our total unrecognized tax benefits, but the amount of change is not estimable.
The amounts of U.S. and foreign income (loss) before income taxes, with a reconciliation of tax at the federal statutory rate with the provision
for income taxes, were:
Income (loss) before income taxes
United States
Foreign
Fe