As filed with the Securities and Exchange Commission on November 14, 2011

File No.            

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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: 281-293-1000

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.

 

Item Caption

 

Location in Information Statement

1.       Business.   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 section of our Information Statement is hereby incorporated by reference: “Management.”

 

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,” “Executive Compensation,” “Compensation Discussion and Analysis” 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,” “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 sections of our Information Statement are 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 sections of our Information Statement are 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, 2010, 2009 and 2008

Combined Balance Sheet as of December 31, 2010 and 2009

Combined Statement of Cash Flows for the years ended December 31, 2010, 2009 and 2008

Combined Statement of Changes in Net Investment for the years ended December 31, 2010, 2009 and 2008

Notes to Combined Financial Statements

Schedule II—Valuation and Qualifying Accounts (Combined)

Unaudited Combined Statement of Income for the nine months ended September 30, 2011 and 2010

Unaudited Combined Balance Sheet as of September 30, 2011 and December 31, 2010

Unaudited Combined Statement of Cash Flows for the nine months ended September 30, 2011 and 2010

Notes to Combined Financial Statements (unaudited)

 

(b) Exhibits . The following documents are filed as exhibits hereto:

 

    Exhibit Number   Exhibit Description

 

 

 

    2.1                                Form of Separation and Distribution Agreement between Phillips 66 and ConocoPhillips.*
    3.1   Form of Phillips 66 Certificate of Incorporation.*
    3.2   Form of Phillips 66 By-laws.*
  10.1   Form of Tax Sharing Agreement between Phillips 66 and ConocoPhillips.*
  10.2   Form of Transition Services Agreement between Phillips 66 and ConocoPhillips.*
  10.3   Form of Employee Matters Agreement between Phillips 66 and ConocoPhillips.*
  10.4   Form of Indemnification Agreement between Phillips 66 and ConocoPhillips.*
  10.5   Form of Intellectual Property Agreement between Phillips 66 and ConocoPhillips.*
  21   List of subsidiaries of Phillips 66.*
  99.1   Preliminary Information Statement of Phillips 66, subject to completion, dated November 14, 2011.

 

 

*To be filed by amendment.

 

iii


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: November 14, 2011

 

By:

 

/s/ Greg C. Garland

    Greg C. Garland
   

President

 

iv


EXHIBIT INDEX

 

Exhibit
Number
   Exhibit Description

 

  

 

  2.1        Form of Separation and Distribution Agreement between Phillips 66 and ConocoPhillips.*
  3.1    Form of Phillips 66 Certificate of Incorporation.*
  3.2    Form of Phillips 66 By-laws.*
10.1    Form of Tax Sharing Agreement between Phillips 66 and ConocoPhillips.*
10.2    Form of Transition Services Agreement between Phillips 66 and ConocoPhillips.*
10.3    Form of Employee Matters Agreement between Phillips 66 and ConocoPhillips.*
10.4    Form of Indemnification Agreement between Phillips 66 and ConocoPhillips.*
10.5    Form of Intellectual Property Agreement between Phillips 66 and ConocoPhillips.*
21    List of subsidiaries of Phillips 66.*
99.1    Preliminary Information Statement of Phillips 66, subject to completion, dated November 14, 2011.

 

 

*To be filed by amendment.

 

v

Exhibit 99.1

(Subject to Completion, Dated November 14, 2011)

LOGO

[ ], 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 ConocoPhillips’ remaining businesses is expected to become effective on [ ], 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 [ ], 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 is seeking 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. It is a condition to completing the separation that ConocoPhillips receive the private letter ruling from the Internal Revenue Service, in form and substance satisfactory to ConocoPhillips, to the effect that 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, which condition may be waived by ConocoPhillips in its discretion. 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 has applied to have its common stock authorized for listing on the New York Stock Exchange under the ticker symbol “[ ].”

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 and
Chief Executive Officer


[Phillips 66 logo]

[ ], 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.

We have applied to have our common stock authorized for listing on the New York Stock Exchange under the ticker symbol “[ ].”

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


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 November 14, 2011)

[LOGO]

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 [ ], 2012, the record date for the distribution.

 

The distribution is expected to occur after the New York Stock Exchange (NYSE) market closing on [ ], 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. We have applied to have Phillips 66’s common stock authorized for listing on the NYSE under the ticker symbol “[ ].” Assuming the NYSE authorizes Phillips 66’s common stock for listing, 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 [ ], 2012.

 

ConocoPhillips first mailed this Information Statement to ConocoPhillips stockholders on or about [ ], 2012.

 

 


TABLE OF CONTENTS

     Page  

Summary

     1   

Our Business

     1   

Our Business Strategies

     2   

Our Competitive Strengths

     3   

The Separation

     5   

Questions and Answers about the Separation and Distribution

     7   

Summary of the Separation and Distribution

     13   

Summary Risk Factors

     16   

Selected Combined Financial Data of Phillips 66

     18   

Risk Factors

     19   

Risks Relating to the Separation

     19   

Risks Relating to Our Industry and Our Business

     24   

Risks Relating to Ownership of Our Common Stock

     29   

Cautionary Statement Regarding Forward-Looking Statements

     32   

The Separation

     34   

General

     34   

Reasons for the Separation

     34   

The Number of Shares You Will Receive

     35   

Treatment of Fractional Shares

     35   

When and How You Will Receive the Distribution of Phillips 66 Shares

     35   

Treatment of Equity-Based Compensation

     36   

Treatment of 401(k) Shares

     36   

Results of the Distribution

     36   

Incurrence of Debt

     37   

Material U.S. Federal Income Tax Consequences of the Distribution

     37   

Market for Common Stock

     40   

Trading Between Record Date and Distribution Date

     40   

Conditions to the Distribution

     41   

Reason for Furnishing this Information Statement

     41   

Dividend Policy

     42   

Capitalization

     43   

Business and Properties

     44   

Overview

     44   

Our Business Strategies

     44   

Our Competitive Strengths

     46   

Segment and Geographic Information

     47   

Competition

     61   

General

     62   

Legal Proceedings

     62   

Management

     64   

Executive Officers Following the Distribution

     64   

Board of Directors Following the Distribution

     64   

Qualification of Directors

     64   

Composition of the Board of Directors

     64   

Committees of the Board of Directors

     65   

Nominating Process of the Committee on Directors’ Affairs

     66   

 

i


     Page  

Decision-Making Process to Determine Director Compensation

     67   

Board Risk Oversight

     67   

Communications with the Board of Directors

     67   

Executive Compensation

     68   

Compensation Discussion and Analysis

     68   

Stock Ownership

     80   

Certain Relationships and Related Transactions

     81   

The Separation from ConocoPhillips

     81   

Related Party Transactions

     81   

Agreements with ConocoPhillips

     81   

Description of Capital Stock

     85   

Where You Can Find More Information

     90   

Unaudited Pro Forma Condensed Combined Financial Statements

     91   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     97   

Executive Overview

     97   

Results of Operations

     100   

Capital Resources and Liquidity

     108   

New Accounting Standards

     117   

Critical Accounting Estimates

     118   

Quantitative and Qualitative Disclosures About Market Risk

     121   

Index to Financial Statements

     F-1   

 

ii


NOTE REGARDING THE USE OF CERTAIN TERMS

We use the following terms to refer to the items indicated:

 

   

“We,” “us,” “our” and “company” 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


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 and unaudited 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 the combination of 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, 10,000 branded marketing outlets, 86,000 miles of pipeline, 7.2 billion cubic feet per day of natural gas processing capacity, and over 40 billion pounds of annual chemicals processing capacity. We believe this positions Phillips 66 to compete with the best in the industry 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 (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 [ ]. Our Internet website is http://www.[ ]. 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


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 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 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 and increasing gasoline and distillate production capacity by 50,000 gross barrels per day. 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 in our industry 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 relative improvement 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


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 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 maintain a 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 the 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 have 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 have been reduced 27 percent over the same period.

A Unique Approach to Downstream Integration

The combination of 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, 10,000 branded marketing outlets, 86,000 miles of pipeline, 7.2 billion cubic feet per day of natural gas processing capacity, and over 40 billion pounds of annual chemicals processing capacity. We believe this positions Phillips 66 to compete with the best in the industry 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

 

 

3


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 2010, our refineries delivered clean product yields in excess of 83 percent, a 2 percent improvement over 2009. 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 8,300 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 22,000 miles of pipelines under management, including crude oil, petroleum product and NGL pipelines; 44 finished product terminals, 7 liquefied petroleum gas terminals, and 1 crude oil terminal; 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, 60 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 exposure 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

 

 

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polyolefins and a leading supplier of aromatics and styrenics. Our investment in CPChem has generated high returns, with a 2010 ROCE of 21 percent and an annualized September 2011 year-to-date ROCE of 30 percent. CPChem is analyzing a number of additional growth projects globally, including proposed construction of a world-scale ethane cracker and derivatives facility at or near one or more of CPChem’s Texas Gulf Coast sites. With an expected annual capacity of at least 3 billion pounds, the cracker would, if progressed, increase CPChem’s U.S. ethylene capacity by as much as 40 percent and allow CPChem to leverage the development of significant shale gas resources in the United States.

The Separation

Overview

On [ ], 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 its specific lines of business. In particular, following the distribution, the value of equity-based

 

 

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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.

 

   

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.

 

 

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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 [ ] , 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 [ ] , 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: 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. 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

 

 

 

7


  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 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 applied for a private letter ruling from the IRS, and expects to receive an opinion from counsel, to the

 

 

 

8


  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, BNY Mellon Shareowner Services, 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 Distributions 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.

 

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.
 

 

 

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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 intend to enter into new financing arrangements in anticipation of the separation and distribution. We expect to incur up to $7.6 billion of new debt and accept assignment of approximately $0.4 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 $5.5 billion to ConocoPhillips. 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 the initial rate of $0.20 per share per quarter, or $0.80 per share per year. 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 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. We have applied to have Phillips 66 common stock authorized for listing on the NYSE under the ticker symbol “ [ ] ,” subject to official notice of issuance. 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.”
 

 

 

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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: The treatment of outstanding ConocoPhillips equity awards in the separation has not been finally determined, and we will include information regarding their treatment in an amendment to this Information Statement.

 

     For additional 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: BNY Mellon Shareowner Services
     P.O. Box 385016
     Pittsburgh, PA 15252-8035

 

Q: Who is the distribution agent for the distribution?

 

A: BNY Mellon Shareowner Services
     P.O. Box 385016
     Pittsburgh, PA 15252-8035

 

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:

 

     BNY Mellon Shareowner Services
     P.O. Box 385016
     Pittsburgh, PA 15252-8035
     Telephone: 800-356-0066 or 1-201-680-6578 (outside the United States, Canada and Puerto Rico)
 

 

 

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     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: shareholder.relations@conocophillips.com

 

 

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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 [ ], 2012.

 

Distribution date

The distribution date is [ ], 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 [ ] shares of ConocoPhillips common stock outstanding on [ ], 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 [ ] 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 [ ], 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

 

 

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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

 

 

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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

We have applied to have our shares of common stock authorized for listing on the NYSE under the ticker symbol “[ ],” subject to official notice of issuance.

 

Dividend policy

We intend to pay a cash dividend at the initial rate of $0.20 per share per quarter, or $0.80 per share per year. 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

BNY Mellon Shareowner Services.

 

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.”

 

 

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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. In the case of ConocoPhillips’ indemnity, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or as to ConocoPhillips’ ability 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.

 

 

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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, even if that change may be considered beneficial by some of our stockholders.

 

   

We may issue preferred stock with terms that could dilute the voting power or reduce the value of our common stock.

 

 

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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, 2010, 2009 and 2008, and the selected combined balance sheet data as of December 31, 2010 and 2009, 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 nine months ended September 30, 2011, and September 30, 2010, and the selected combined balance sheet data as of September 30, 2011, from Phillips 66’s unaudited combined financial statements, which are included elsewhere in this Information Statement. We derived the selected combined income statement data for the years ended December 31, 2007 and 2006, and the selected combined balance sheet data as of December 31, 2008, 2007 and 2006, 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. In management’s opinion, the unaudited combined financial statements have been prepared on substantially the same basis as the audited combined financial statements and include all known accruals and adjustments necessary for a fair presentation of the combined financial information for the periods presented. 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  
 

 

 

 
    Nine Months Ended
September 30
          Year Ended December 31  
 

 

 

       

 

 

 
    2011      2010           2010      2009      2008      2007      2006  
 

 

 

       

 

 

 

Sales and other operating revenues

  $ 147,983         105,400            146,561         112,692         171,706         139,383         133,555   

Net income

    2,768         452            740         479         2,665         6,121         5,105   

Net income attributable to Phillips 66

    2,764         448            735         476         2,662         6,116         5,099   

Total assets

    47,923         45,553            44,955         42,880         38,934         43,133         40,996   

Long-term debt

    365         394              388         403         417         442         462   

 

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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 we believe are reasonable; however, our assumptions 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

 

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financial condition or future results of operations. 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 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 [ ], 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.” However, we cannot assure you that ConocoPhillips will successfully execute all these functions during the transition period or that we will not 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.

Through the date of the separation, our financial results were included within the consolidated results of ConocoPhillips, and we believe our disclosure and internal controls were appropriate for those of subsidiaries of a public company. However, we were 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.” As a result of 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 these assessments. 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

 

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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 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.” However, if ConocoPhillips is unable to pay any prior period taxes for which it is responsible, 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 applied for 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 Internal Revenue Code of 1986. Although ConocoPhillips’ Board of Directors may waive the condition of receiving the ruling, ConocoPhillips has advised us that it does not currently intend to complete the distribution if it has not obtained the IRS private letter ruling substantially to the effect that the distribution, together with certain related transactions, will so qualify. The private letter ruling and the tax opinion that ConocoPhillips expects to receive from Wachtell, Lipton, Rosen & Katz, special counsel to ConocoPhillips, will rely 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 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, 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.

 

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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. In the case of ConocoPhillips’ indemnity, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or as to ConocoPhillips’ ability to satisfy its indemnification obligations in the future.

Pursuant to the Indemnification 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 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, there can be no assurance that the indemnity from ConocoPhillips will be sufficient to protect us against the full amount of such liabilities, or that ConocoPhillips will 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.” Notwithstanding agreements between ConocoPhillips and us, after the separation ConocoPhillips’ insurers may deny coverage to us for losses associated with occurrences prior to the separation. Even if we ultimately succeed in recovering from such insurance providers, we may be required to temporarily bear the costs of such lost coverage.

 

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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.

ConocoPhillips’ Board of Directors and management do not expect the separation will improve access to debt markets or commercial credit, particularly for us. As integration has enhanced ConocoPhillips’ scale and diversity of operations, the separation of our business from ConocoPhillips’ businesses may increase the overall cost of debt funding and decrease overall debt and commercial credit capacity, including credit extended by third-party suppliers. Nonetheless, ConocoPhillips’ Board of Directors and management have concluded the separation should not constrain our financing alternatives in a manner that would outweigh the other benefits of the separation.

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 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 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.”

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

 

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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. It is possible that 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, it is possible 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. Generally, an increase or decrease in the price of crude oil affects the price of gasoline and other refined products. However, 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.

 

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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 were 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.

Upon our separation from ConocoPhillips, based on our expected capital structure and a comparison with peers in our industry, we expect to initially receive an investment grade credit rating from Standard & Poor’s Rating Service and Moody’s Investor 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.) We may not initially receive such ratings or, if received, 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.

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.

 

25


   

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.

Although our business operations are designed and operated to accommodate expected climatic conditions, 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 their ability to compete with renewable fuels.

Large refinery capital projects can take many years to complete, and market conditions could deteriorate significantly between the project sanction date and the project startup date, negatively impacting project returns.

To sanction 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 metric.

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. There is a risk our joint venture participants may at any time have economic, business or legal interests or

 

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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 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.

 

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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 has commenced a study of 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.

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 industry. In

 

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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. We cannot assure you that an active trading market will develop or be sustained for our common stock after the distribution, nor can we 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 [ ] 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 of our common stock will be sold in the open market following the distribution. We are also unable to predict

 

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whether a sufficient number of buyers would 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, it is possible other ConocoPhillips stockholders will 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 September 30, 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. We can provide no assurance there will 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.

 

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We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal, and are not intended to make our company immune from takeovers. However, these provisions apply even if the 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.”

 

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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 “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 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

 

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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/refined product inventory levels.

   

The factors generally described in the section entitled “Risk Factors” in this Information Statement.

 

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THE SEPARATION

General

On [ ], 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 countries 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.

 

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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.

 

   

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 [ ], 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 [ ], 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, BNY Mellon Shareowner Services (BNY Mellon), 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

 

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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 BNY Mellon 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

The treatment of outstanding ConocoPhillips equity awards in the separation has not been finally determined, and we will include information regarding their treatment in an amendment to this Information Statement.

Treatment of 401(k) Shares

The treatment of shares of ConocoPhillips common stock held in defined contribution retirement plans maintained by ConocoPhillips has not been finally determined, and we will include information regarding their treatment in an amendment to this Information Statement.

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 [ ] stockholders of record, based on the number of registered stockholders of ConocoPhillips common stock on [ ], and approximately [ ] 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).

 

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For a more detailed description of these agreements, see “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 expected plan of reorganization to be set forth in the Separation and Distribution Agreement, prior to the separation, we expect to incur up to $7.6 billion of new debt and accept assignment of approximately $0.4 billion of existing ConocoPhillips debt associated with downstream operations. Of the new debt, $4.0 billion to $6.0 billion is expected to be distributed among long-term maturities ranging from three to thirty years. Initially, the remainder of the new debt is expected to consist of a funded short-term bridge facility. At separation, we plan to retain a minimum of $2.0 billion of cash and cash equivalents and provide a cash distribution of approximately $5.5 billion to ConocoPhillips.

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 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.

 

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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 applied for a private letter ruling from the IRS, and expects to receive 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 fractional shares 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 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, ConocoPhillips expects to obtain an opinion of 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 will rely on the ruling as to matters covered by the ruling. In addition, the opinion will be 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 will not be binding on the IRS or the courts.

Notwithstanding receipt by ConocoPhillips of the private letter ruling from the IRS and 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

 

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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.

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 after the distribution by ConocoPhillips or us, the party responsible for such failure would be responsible for all taxes imposed on ConocoPhillips to the extent such taxes result from such actions. However, if such failure was 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 of such acquisition. 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 and backup withholding (currently at a rate of 28 percent), unless the stockholder provides proof of an applicable

 

39


exemption or 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’s common stock. A condition to the distribution is the listing on the NYSE of our common stock. We have applied to have Phillips 66 common stock authorized for listing on the NYSE under the ticker symbol “[ ],” subject to official notice of issuance.

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 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.

 

40


Conditions to the Distribution

We expect the distribution will be effective on [ ], 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.

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.

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.

 

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DIVIDEND POLICY

After the separation, Phillips 66 intends to pay a cash dividend to its common stockholders at the 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 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.

 

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CAPITALIZATION

The following table sets forth (i) our historical capitalization as of September 30, 2011, and (ii) our adjusted capitalization assuming the distribution, the incurrence of debt and other matters (as discussed in “The Separation”) was effective September 30, 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  
 

 

 

 
    September 30  
 

 

 

 
    2011      2011  
 

 

 

 
    Actual      As
Adjusted
 
 

 

 

 

Debt Outstanding

    

Short-term debt

  $ 32         2,632   

Long-term debt

    365         5,365   

Total Debt

    397         7,997   

Net Investment/Stockholders’ Equity

    

Common stock

    

Par value

    -         7   

Capital in excess of par

    -         21,027   

Net parent company investment

    26,197         -   

Accumulated other comprehensive income (loss)

    147         (140

Noncontrolling interests

    28         28   

Total Net Investment/Stockholders’ Equity

    26,372         20,922   

Total Capitalization

  $     26,769         28,919   
                  

 

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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 crude oil processing capacity of 1.8 million barrels per day, and a global 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 $8 billion in assets and 2,900 employees across the United States as of December 31, 2010.

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 $8 billion in assets and 4,600 employees worldwide as of December 31, 2010.

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 and increasing gasoline and distillate production capacity by 50,000 gross barrels per day. Additionally, on an ongoing basis, we evaluate and execute R&M projects designed to improve operating efficiency.

 

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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 in our industry 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 relative improvement 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 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 maintain a 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 the 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.

 

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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 have 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 have been reduced 27 percent over the same period.

A Unique Approach to Downstream Integration

The combination of 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, 10,000 branded marketing outlets, 86,000 miles of pipeline, 7.2 billion cubic feet per day of natural gas processing capacity, and over 40 billion pounds of annual chemicals processing capacity. We believe this positions Phillips 66 to compete with the best in the industry 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 2010, our refineries delivered clean product yields in excess of 83 percent, a 2 percent improvement over 2009. 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 8,300 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

 

46


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 22,000 miles of pipelines under management, including crude oil, petroleum product and NGL pipelines; 44 finished product terminals, 7 liquefied petroleum gas terminals, and 1 crude oil terminal; 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, 60 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 exposure 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, with a 2010 ROCE of 21 percent and an annualized September 2011 year-to-date ROCE of 30 percent. CPChem is analyzing a number of additional growth projects globally, including proposed construction of a world-scale ethane cracker and derivatives facility at or near one or more of CPChem’s Texas Gulf Coast sites. With an expected annual capacity of at least 3 billion pounds, the cracker would, if progressed, increase CPChem’s U.S. ethylene capacity by as much as 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 (audited), 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.

 

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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, 2010:

 

              Thousands of Barrels Daily        

Refinery

 

Location

    Interest     Net Crude
Throughput
Capacity
    Clean Product
Capacity
    Clean
Product
Yield
Capability
 
        Gasolines     Distillates    

East Coast Region

           

Bayway

  Linden, NJ     100     238        145        110        90

Trainer*

  Trainer, PA     100        185        105        65        85   

 

 
        423         

 

 

Gulf Coast Region

           

Alliance

  Belle Chasse, LA     100        247        125        120        88   

Lake Charles

  Westlake, LA     100        239        90        110        69   

Sweeny

  Old Ocean, TX     100        247        130        120        86   

 

 
        733         

 

 

Central Region

           

Wood River**

  Roxana, IL     50        153        83        45        80   

Borger**

  Borger, TX     50        73        55        28        89   

Ponca City

  Ponca City, OK     100        187        105        75        90   

Billings

  Billings, MT     100        58        35        25        89   

 

 
        471         

 

 

West Coast Region

           

Ferndale

  Ferndale, WA     100        100        55        30        75   

Los Angeles

  Carson/ Wilmington, CA     100        139        85        61        86   

San Francisco

  Arroyo Grande/ San Francisco, CA     100        120        59        59        87   

 

 
        359         

 

 
        1,986 ***       

 

 
    *Idled effective October 1, 2011.
  **Represents our proportionate share.
***Effective October 1, 2011, net crude throughput capacity is 1,801 thousand barrels per day, which excludes the Trainer Refinery.

 

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Primary crude oil characteristics and sources of crude oil for our U.S. refineries are as follows:

 

    Characteristics         Sources  
    Sweet     Medium
Sour
    Heavy
Sour
    High
TAN
*
        United
States
    Canada     South
America
    Europe
&  FSU
**
    Middle East
& Africa
 

Bayway

                                                                                                                  

Trainer

                                                                                                      

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. On September 27, 2011, ConocoPhillips announced it is seeking a buyer for 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.

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.

 

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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 to customers 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. In addition, following the separation and distribution, Phillips 66 generally will indemnify ConocoPhillips for liabilities 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.

 

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Central Region

WRB

In 2007, ConocoPhillips entered into a business venture with Cenovus Energy Inc. to create an integrated North American heavy oil business. The venture consists of two 50/50 business ventures: 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 crude is currently 145,000 barrels per day. We have completed the CORE project at the Wood River Refinery, with operational startup anticipated in the fourth quarter of 2011. Upon completion of the CORE project, total processing capability of heavy Canadian or similar crudes within WRB increased to 275,000 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. Upon completion of the CORE project, gross heavy crude oil capacity increased from 95,000 barrels per day to 225,000 barrels per day, and clean product yield increased by 5 percent. 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.

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.

 

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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, 2010, we marketed gasoline, diesel and aviation fuel through approximately 8,300 marketer-owned or -supplied outlets in 49 states. The majority of these sites utilize the Phillips 66 , Conoco or 76  brands.

Wholesale

At December 31, 2010, our wholesale operations utilized a network of marketers operating approximately 7,150 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 400 sites. We also buy and sell petroleum products in the spot market. 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, 2010, aviation gasoline and jet fuel were sold through independent marketers at approximately 750 Phillips 66 -branded locations in the United States.

 

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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 under the Phillips 66, Conoco, 76 and Kendall brands, as well as other private label brands.

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, 2010, R&M managed approximately 22,000 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 44 finished product terminals, 7 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.

 

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The following table depicts our ownership interest in major pipeline systems as of December 31, 2010:

 

Name

     

Origination/Terminus

  Interest     Size    Miles     Capacity
MBD
 

Crude

            

Coast and Valley System

    Central CA/Bay Area, CA     100      8”-12”      558        307   

Clifton Ridge

    Westlake, Equillon, Pecan Grove, LA     100      12”-20”      11        270   

Cushing

    Cushing, OK/Ponca City, OK     100      18”      62        130   

WA Line

    Odessa, TX/Borger, TX     100      12”-14”      289        118   

Oklahoma Mainline/CPL

    Wichita Falls, TX/Ponca City, OK     100      12”      217        100   

Line O

    Cushing, OK/Borger, TX     100      10”      276        37   

Line 80

    Gaines, TX/Borger, TX     100      8”, 12”      232        33   

Glacier

    Cut Bank, MT/Billings, MT     79      8”-10”-12”      865        100   

Seaway Crude

      Sweeny, TX/Cushing, OK     50   30”      502        350   

Petroleum Product

            

Sweeny to Pasadena

    Sweeny, TX/Pasadena, TX     100      12”, 18”      120        264   

Gold Line

    Borger, TX/St. Louis, IL     100      8”-16”      681        120   

Standish

    Cushing, OK/Wichita, KS     100      18”-12”      148        80   

Borger to Amarillo

    Borger, TX/Amarillo, TX     100      8”, 10”      93        76   

Seaway Products***

    Pasadena, TX/Cushing, OK     100      16”-20”      524        58   

Wood River

    Ponca City, OK/Mt. Vernon, MO     100      10”-12”      248        45   

Okla. City/Cherokee 8”

    Ponca City, OK/Okla. City, OK     100      8”      90        46   

Wichita/Ark City 1&2

    Ponca City, OK/Wichita, KS     100      8”-10”      105        55   

Seminoe

    Billings, MT/Sinclair, WY     100      8”      342        33   

Borger-Denver

    McKee, TX/Denver, CO     70      8”, 12”      405        38   

Pioneer

    Sinclair, WY/Salt Lake City, UT     50      8”, 12”      306        63   

ATA Line

    Amarillo, TX/Albuquerque, NM     50      6”, 10”      293        20   

Heartland

    McPherson, KS/Des Moines, IA     50      8”, 6”      49        30   

Skelly-Belvieu

    Skellytown, TX/Mont Belvieu, TX     50      8”      577        29   

Yellowstone

    Billings, MT/Spokane, WA     46      6”-10”      710        66   

Harbor

    Woodbury, NJ/Linden, NJ     33      16”      80        104   

SAAL

    Amarillo, TX/Amarillo and
Lubbock, TX
    33      6”      121        18   

Colonial

    Pasadena, TX/New York, NY     17      30”-40”      5,593        2,200   

Explorer

      Texas Gulf Coast/Chicago, IL     14      24”, 28”      1,885        500   

NGL

            

Line EZ

    Rankin, TX/Sweeny, TX     100 **    10”      434        101   

Blue Line

    Borger, TX/St. Louis, IL     100      8”-12”      666        29   

Powder River

    Douglas, WY/Borger, TX     50      6”-8”      695        19   

Chisholm

      Kingfisher, OK/Conway, KS     100      8”-10”      185        42   

LPG

            

Medford PBC

    Ponca City, OK/Medford, OK     100      4”-12”      81        60   

Conway to Wichita

      Conway, KS/Wichita, KS     100      12”      55        38   
    *50% ownership in management company.
  **100% interest held by CPChem. Operated by Phillips 66.
***Sold as of October 31, 2011.

 

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Tankers

At December 31, 2010, we utilized 19 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 four 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 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 petroleum cokes, polypropylene, pipeline flow improvers and anode material for high-power lithium-ion batteries. We also 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. Our specialty products are marketed under the LiquidPower , ThruPlus , CPreme and COPYLENE brand names.

R&M—INTERNATIONAL

Refining

We own or have an interest in four refineries outside the United States.

 

                  Thousands of Barrels Daily         

Refinery

  

Location

   Interest     Net Crude
Throughput
Capacity*
     Clean Product
Capacity*
     Clean
Product
Yield
Capability
 
           Gasolines      Distillates     

Humber

   N. Lincolnshire, United Kingdom      100.00     221         84         112         84

Whitegate

   Cork, Ireland      100.00        71         15         30         65   

MiRO**

   Karlsruhe, Germany      18.75        58         25         26         85   

Melaka

   Melaka, Malaysia      47.00        76         18         47         85   

 

 
          426            

 

 
  *Effective January 1, 2011.
**Mineraloelraffinerie Oberrhein GmbH.

Primary crude oil characteristics and sources of crude oil for our international refineries are as follows:

 

     Characteristics         Sources
     Sweet   

Medium

Sour

  

Heavy

Sour

  

High

TAN*

       

Europe

& FSU**

   Middle East
& Africa

Humber

                        

Whitegate

                          

MiRO

                        

Melaka

                      
  *High TAN (Total Acid Number): acid content greater than or equal to 1.0 milligram of potassium hydroxide (KOH) per gram.
**Former Soviet Union.

 

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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 Mineraloel Raffinerie 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 our proprietary 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.

WRG

The Wilhelmshaven Refinery (WRG) is located in the northern state of Lower Saxony in Germany, and has a 260,000 barrels-per-day crude oil processing capacity. Effective January 1, 2011, we no longer included WRG’s capacity in our stated refining capacities or our capacity utilization metrics, as a result of the evaluation of alternatives to either sell the facility or operate it as a terminal. On August 31, 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.

 

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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, 2010, we had approximately 1,450 marketing outlets in our European operations, of which approximately 890 were company-owned and 360 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 245 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 2010, including our share of DCP Midstream, was 184,000 barrels per day, compared with 179,000 barrels per day in 2009.

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 60 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 2010, DCP Midstream’s raw natural gas throughput averaged 6.1 billion cubic feet per day, and NGL extraction averaged 369,000 barrels per day, compared with 6.1 billion cubic feet per day and 358,000 barrels per day in 2009. 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.

 

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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 plans to construct a natural gas processing plant in the Eagle Ford shale area of Texas. The plant, named the Eagle Gas 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 Gas 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 second 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.

 

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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 2010, CPChem owned or had joint-venture interests in 36 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.

CPChem’s manufacturing facilities are located in Belgium, China, Colombia, Qatar, Saudi Arabia, Singapore, South Korea and the United States.

 

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The following table reflects CPChem’s petrochemicals and plastics product capacities at December 31, 2010:

 

     Millions of Pounds per Year  
                 U.S.      Worldwide  

O&P

     

Ethylene

     7,830         9,365   

Propylene

     2,950         3,115   

High-density polyethylene

     4,190         5,635   

Low-density polyethylene

     620         620   

Linear low-density polyethylene

     420         420   

Polypropylene

     420         420   

Normal alpha olefins

     1,490         1,930   

Polyalphaolefins

     105         105   

Polyethylene pipe

     550         550   

 

 

Total O&P

     18,575         22,160   

 

 

SA&S

     

Benzene

     1,600         2,470   

Cyclohexane

     1,065         1,460   

Paraxylene

     1,000         1,000   

Styrene

     1,050         1,875   

Polystyrene

     835         1,180   

K-Resin ® SBC

     100         170   

Specialty chemicals

     605         705   

Ryton ® PPS

     35         55   

 

 

Total SA&S

     6,290         8,915   

 

 
Capacities include CPChem’s share in equity affiliates and joint ventures.

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 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.

In 2010, CPChem began studying the construction of a world-scale ethane cracker, which would be located at or near one or more of its Texas Gulf Coast sites. The ethylene and associated derivatives would leverage the development of significant shale gas resources in the United States. If the project goes forward, its expected annual capacity of at least 3 billion pounds would increase CPChem’s U.S. ethylene capacity by as much as 40 percent. The feasibility study is expected to be completed by the end of 2011.

In September 2011, CPChem announced it entered into an agreement to acquire a polyalphaolefins (PAO) plant located in Beringen, Belgium. The addition of the plant would more than double CPChem’s PAO production capability. The purchase is subject to regulatory approvals and satisfaction of necessary closing conditions. PAOs are used in many synthetic products, such as lubricants, greases and fluids, and have emerged as essential components in many industries and applications.

 

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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 joint venture that began construction of a second complex in Mesaieed in 2005. The Q-Chem II facility is designed to produce 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. Collectively, Q-Chem II’s interest in the ethane cracker and pipeline and the polyethylene and NAO plants are referred to as the “Q-Chem II Project.” Operational startup of the Q-Chem II Project was achieved 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.

Saudi Polymers Company (SPCo), a 35-percent-owned joint venture company of CPChem, is constructing an integrated petrochemicals complex at Jubail Industrial City, Saudi Arabia. SPCo will produce ethylene, propylene, polyethylene, polypropylene, polystyrene and 1-hexene. Construction began in January 2008, with operations expected to commence in the fourth quarter of 2011.

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 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.

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 several 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 6, 2010, issue of the Oil & Gas Journal , our R&M segment had the largest U.S. refining capacity of 17 large refiners of petroleum products. Worldwide, our refining capacity ranked fourth

 

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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 2010 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 the end of 2010, we held a total of 598 active patents in 48 countries worldwide, including 217 active U.S. patents. During 2010, we received 17 patents in the United States and 34 foreign patents. Our products and processes generated licensing revenues of $30 million in 2010. 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 $56 million, $36 million and $44 million in 2010, 2009 and 2008, 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 Liability—Contingencies” under the captions “Environmental” and “Climate Change.” It includes information on expensed and capitalized environmental costs for 2010 and those expected for 2011 and 2012.

We had approximately 12,400 employees at September  30, 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.

 

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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.

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, facilities. On January 6, 2010, the DOJ provided its initial penalty demand for this matter as part of our confidential settlement negotiations. We have reached an agreement with the EPA and DOJ regarding an appropriate penalty amount, which will be reflected in the third amendment to the consent decree in Civil Action No. H-05-258 (the agreed-upon penalty amount remains confidential until that time).

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 October 2003, the District Attorney’s Office in Sacramento, California, filed a complaint in Superior Court for alleged methyl tertiary-butyl ether (MTBE) contamination in groundwater. On April 4, 2008, the District Attorney’s Office filed an amended complaint that included alleged violations of state regulations relating to operation or maintenance of underground storage tanks. There are numerous other defendants named in the suit. We continue to contest this lawsuit.

On April 13, 2011, we received a Notice of Enforcement and Proposed Agreed Order from the Texas Commission on Environmental Quality (TCEQ) seeking a penalty to settle several alleged violations of air pollution control regulations and/or facility permit conditions at the Borger Refinery. These violations were previously disclosed on the ConocoPhillips Borger Refinery Title V deviation report. The Proposed Order seeks a settlement penalty in the amount of $147,000. We are working with the TCEQ to resolve this matter.

 

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MANAGEMENT

Executive Officers Following the Distribution

The following table sets forth information as of November 14, 2011, regarding the individual who is expected to serve as our chief executive officer following the distribution. Additional executive officers will be appointed prior to the distribution and we will include information concerning those executive officers in an amendment to this Information Statement. After the distribution, none of these individuals will continue to be employees of ConocoPhillips.

 

             Name    Age*

Greg C. Garland

   54

 

*On October 31, 2011.

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 next 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 officer identified above.

Greg C. Garland will be the 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.

Board of Directors Following the Distribution

We are in the process of identifying the individuals, in addition to Mr. Garland, who will be our directors following the distribution, and we will provide details regarding these individuals in an amendment to this Information Statement.

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 Committee on Directors’ Affairs 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.

Composition of the Board of Directors

We currently expect that, upon the consummation of our separation, our Board of Directors will consist of [ ] 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.

 

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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.[ ].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 Executive Committee is expected to consist of [ ] members. 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.[ ].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 Committee on Directors’ Affairs) and setting the compensation of the Chief Executive Officer (CEO).

 

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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.[ ].com.

Committee on Directors’ Affairs— The principal functions of the Committee on Directors’ Affairs 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 Committee on Directors’ Affairs 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 Committee on Directors’ Affairs will be determined prior to the distribution.

A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Committee on Directors’ Affairs charter, which will be available on our website: www.[ ].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 Public Policy Committee is expected to consist of [ ] directors. 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.[ ].com.

Nominating Process of the Committee on Directors’ Affairs

One of the principal functions of the Committee on Directors’ Affairs will be selecting and recommending director candidates to the Board of Directors to be submitted for election at the annual meeting of

 

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stockholders and to fill any vacancies on the Board. We expect that the Committee on Directors’ Affairs 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 Committee on Directors’ Affairs 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 Committee on Directors’ Affairs. The Committee on Directors’ Affairs 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 Committee on Directors’ Affairs, 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, [Address]

   

Phone Number : [ ]

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.

 

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EXECUTIVE COMPENSATION

The five persons who we expect will be our named executive officers as of the distribution date will be included in a subsequent amendment. For purposes of the following Compensation Discussion and Analysis, we refer to them collectively as our “Named Executive Officers.” Our expectation is that, prior to the separation, each of our Named Executive Officers will have been employed by ConocoPhillips or its subsidiaries; therefore, the information provided for the years 2011, 2010 and 2009 reflects compensation earned at ConocoPhillips or its subsidiaries 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 will be made by ConocoPhillips. To the extent such persons are senior officers of ConocoPhillips, the decisions will be 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 Compensation Committee of Phillips 66 (our “Compensation Committee”).

COMPENSATION DISCUSSION AND ANALYSIS

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 68).

   

Effects of Separation on Outstanding Compensation Awards —This section discusses the effect of the separation on outstanding compensation awards for our Named Executive Officers (beginning on page 79).

   

Phillips 66 Compensation Programs —This section discusses the anticipated executive compensation programs at Phillips 66 (beginning on page 79).

 

 

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.

 

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2011 Compensation —Information regarding 2011 compensation decisions will be included in subsequent amendments.

 

 

Analysis of 2011 Executive Compensation

Information regarding 2011 compensation decisions will be included in subsequent amendments.

 

 

The Objectives and Process of Compensating ConocoPhillips’ 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 the 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. The Named Executive Officers each serve without an employment agreement. All compensation for these officers is set by the Committee as described below.

 

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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 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 the 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 ConocoPhillips’ Named Executive Officers.

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 Corporation, Royal Dutch Shell plc, BP p.l.c., and Chevron Corporation.

The HRCC also utilized a secondary group of peer companies for benchmarking the compensation of ConocoPhillips Named Executive Officers—Valero Energy Corporation, Marathon Oil Corporation, Occidental Petroleum Corporation, and, for staff executives, other large, publicly held companies, including those outside the energy industry.

ConocoPhillips utilizes the primary peer group 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.

 

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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 S.A., 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’ 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. 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

 

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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. 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.

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 Internal Revenue Code and designs its compensation programs with the intent that they comply with section 409A of the Internal Revenue 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 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 options. 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 ConocoPhillips’ 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.

 

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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’ 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. 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 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 option exercise prices at not less than 100 percent of ConocoPhillips stock’s fair market value at the time of the grant. Because the 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 an option holder receives any financial benefit from the 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

 

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to senior officers. 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 stockholders. Such extended holding periods also enable ConocoPhillips to more readily withdraw awards should circumstances arise that merit such action. To date, no 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 in 2011.

Broadly Available Plans

The 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 the Named Executive Officers a limited number of additional benefits. In order to provide a competitive package of compensation and benefits, ConocoPhillips provides the 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 the 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,

 

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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 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 the 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 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.

 

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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” to be provided in future amendments. The structure and use of these plans are competitive within the industry and are intended to aid ConocoPhillips in attracting and retaining executives.

 

 

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

 

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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 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 Adjusted Improvement in 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

 

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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 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 ConocoPhillips’ Named Executive Officers are approved by the HRCC, based on the recommendation of the CEO of ConocoPhillips (other than for himself). The CEO’s individual adjustment 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 Internal Revenue 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 Internal Revenue 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 Named Executive Officer. Performance criteria for the 2010 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 Named Executive Officer: (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 Named Executive Officer: (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

 

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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.

 

 

Effects of Separation on Outstanding Executive Compensation Awards

Information regarding the effect of the separation on outstanding executive compensation awards will be included in subsequent amendments.

Phillips 66 Compensation Programs

Information regarding the Phillips 66 compensation programs will be included in subsequent amendments.

 

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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 [ ], 2011, 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 [ ] million shares of common stock based upon approximately [ ] shares of ConocoPhillips common stock outstanding on [ ], 2011, 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.

 

 

Information regarding stock ownership will be included in subsequent amendments.

 

 

 

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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

The company’s 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 Chairman of the Committee on Directors’ Affairs 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 Committee on Directors’ Affairs 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 each Board member.

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 and 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 Agreement.

   

Tax Sharing Agreement.

   

Employee Matters Agreement.

   

Transition Services Agreement.

The forms of certain of the principal agreements described below will be filed as exhibits in an amendment 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 are incorporated by reference into this Information Statement.

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.

 

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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. We expect the Separation and Distribution Agreement will require ConocoPhillips and us to use commercially reasonable efforts 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.

We expect that, 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, we expect each party will agree to hold the assets or liabilities until they can be transferred to the other party pending receipt of consent.

The Separation and Distribution Agreement will specify those conditions that must be satisfied or waived by ConocoPhillips prior to the distribution. In addition, we expect that 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 at any time prior to the distribution.

Indemnification Agreement

We expect to enter into a separate Indemnification Agreement with ConocoPhillips that will govern the treatment of all aspects relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation.

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 businesses, and ConocoPhillips generally will be responsible for all other such taxes.

 

   

With respect to U.S. state or local income taxes of any state or local consolidated, combined or unitary group that includes ConocoPhillips or one of its subsidiaries or us, we generally will be responsible for such taxes to the extent attributable to one of our subsidiaries included in such consolidated, combined or unitary group.

 

   

Subject to certain exceptions relating to foreign income taxes, ConocoPhillips generally will be responsible for any U.S. federal, state or local or foreign income taxes reportable on returns that

 

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include only ConocoPhillips and its subsidiaries (excluding us and our subsidiaries), and we generally will be responsible for any U.S. federal, state or local or foreign income taxes reportable on returns that include only us or our subsidiaries.

 

   

We and ConocoPhillips generally will be responsible for certain non-income taxes, such as property, motor fuel, excise, sales and use taxes, attributable to each company and its respective subsidiaries (or property owned by such company or one of its subsidiaries following the distribution).

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, was not tax-free. In general, under the Tax Sharing Agreement, each party is expected to 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 such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party 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.

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 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 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 Phillips 66 on a delayed basis because they will continue to provide services to ConocoPhillips 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 the 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

 

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historically have shared. Transition services may include administrative, payroll, human resources, data processing, environmental health and safety, financial audit support, financial transaction support, legal support services, 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 [ ] months, on a cost or a cost-plus basis.

 

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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 Certificate of Incorporation and By-laws to be in effect at the time of the distribution will be 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 [ ] million shares of common stock, par value $0.01 per share.

Shares Outstanding— Immediately following the distribution, we expect that approximately [ ] million shares of our common stock will be issued and outstanding based upon approximately [ ] shares of ConocoPhillips common stock outstanding as of [ ], 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 plurality of shares present in person or by proxy and entitled to vote.

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.

 

85


Preferred Stock

We are authorized to issue up to [ ] 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 the 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 [ ] 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 20[13], Class II directors will have an initial term expiring in 20[14] and Class III directors will have an initial term expiring in 20[15]. 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.

 

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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 more than 60 days 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. Our Certificate of Incorporation will also confer on our Board of Directors the power to adopt, amend or repeal our By-laws.

 

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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 will be subject to Section 203 of the Delaware General Corporation Law. 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% 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 BNY Mellon Shareowner Services.

NYSE Listing

We have applied to have our shares of common stock authorized for listing on the NYSE under the ticker symbol “[ ],” subject to official notice of issuance.

 

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Limitation on Liability of Directors and Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law (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 shall 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.

 

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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 [ ]. 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.

 

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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 approximately $7.6 billion of new debt.

   

The cash distribution of approximately $5.5 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 separation and distribution, tax sharing, transition services, employee matters and indemnification agreements have not been finalized, and the pro forma statements will be revised in future amendments to reflect the impact of those agreements, to the extent they are deemed material.

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 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 in the range of $[ ] million to $[ ] 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 in the range of $[ ] million to $[ ] million, before-tax.

The unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2011, and the year ended December 31, 2010, have been prepared as though the separation occurred on January 1, 2010. The unaudited pro forma condensed combined balance sheet at September 30, 2011, has been prepared as though the separation occurred on September 30, 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.

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 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 in this Information Statement.

 

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Unaudited Pro Forma Condensed Combined Statement of Income      Phillips 66   
Nine Months Ended September 30, 2011   

 

    Millions of Dollars  
 

 

 

 
    As
Reported
    Pro Forma
Adjustments
   

Pro

Forma

 
 

 

 

 

Revenues and Other Income

     

Sales and other operating revenues*

    $147,983        -        147,983    

Equity in earnings of affiliates

    2,330        -        2,330    

Loss on dispositions

    (175     -        (175)   

Other income

    28        -        28    

 

 

Total Revenues and Other Income

    150,166        -        150,166    

 

 

Costs and Expenses

     

Purchased crude oil and products*

    129,853        -        129,853    

Operating expenses

    3,087        -        3,087    

Selling, general and administrative expenses

    1,042        -        1,042    

Depreciation and amortization

    667        9  (a)      676    

Impairments

    488        -        488    

Taxes other than income taxes

    10,785        -        10,785    

Accretion on discounted liabilities

    16        -        16    

Interest and debt expense

    11        314  (b)      325    

Foreign currency transaction (gains) losses

    (56     -        (56)   

 

 

Total Costs and Expenses

    145,893        323        146,216    

 

 

Income before income taxes

    4,273        (323     3,950    

Provision for income taxes

    1,505        (124 )(c)      1,381    

 

 

Net income

    2,768        (199     2,569    

Less: net income attributable to noncontrolling interests

    (4     -        (4)   

 

 

Net Income Attributable to Phillips 66

  $ 2,764        (199 )       2,565     

 

 

Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)

     

Basic

          $      3.67  (d) 

Diluted

        3.64  (d) 

 

 

Average Common Shares Outstanding (in thousands)

     

Basic

        698,108  (d) 

Diluted

        704,423  (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 12—Related Party Transactions, in the Combined Financial Statements (unaudited), for the amount of revenue and purchases with ConocoPhillips for the nine months ended September 30, 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.

 

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Unaudited Pro Forma Condensed Combined Statement of Income      Phillips 66   
Year Ended December 31, 2010   

 

    Millions of Dollars  
 

 

 

 
   

As

Reported

    Pro Forma
Adjustments
   

Pro

Forma

 
 

 

 

 

Revenues and Other Income

     

Sales and other operating revenues*

  $     146,561        -        146,561   

Equity in earnings of affiliates

    1,765        -        1,765   

Gain on dispositions

    241        -        241   

Other income

    89        -        89   

 

 

Total Revenues and Other Income

    148,656        -        148,656   

 

 

Costs and Expenses

     

Purchased crude oil and products*

    125,092        -        125,092   

Operating expenses

    4,189        -        4,189   

Selling, general and administrative expenses

    1,384        -        1,384   

Depreciation and amortization

    880        10  (a)      890   

Impairments

    1,699        -        1,699   

Taxes other than income taxes

    13,985        -        13,985   

Accretion on discounted liabilities

    22        -        22   

Interest and debt expense

    1        402  (b)      403   

Foreign currency transaction (gains) losses

    85        -        85   

 

 

Total Costs and Expenses

    147,337        412        147,749   

 

 

Income before income taxes

    1,319        (412     907   

Provision for income taxes

    579        (158 )(c)      421   

 

 

Net income

    740        (254     486   

Less: net income attributable to noncontrolling interests

    (5     -        (5)   

 

 

Net Income Attributable to Phillips 66

  $ 735        (254     481   

 

 

Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)

     

Basic

          $      .65  (d)  

Diluted

        .65  (d) 

 

 

Average Common Shares Outstanding (in thousands)

     

Basic