With Conditions, FTC Approves Merger of Phillips and Conoco

The Federal Trade Commission today announced a proposed consent order with Phillips Petroleum Company (Phillips) and Conoco Inc. (Conoco) that would allow the merger of the two companies to proceed upon their agreement to sell certain assets and provide other relief. Without these conditions, the Commission stated in its complaint, the proposed merger would violate federal antitrust laws and lead to decreased competition through an increase in the likelihood of coordinated interaction, particularly in the Rocky Mountain region of the United States.

"The Commission's action today reflects our ongoing effort to enforce vigorously the antitrust laws in all aspects of the energy sector," said Joe Simons, Director of the FTC's Bureau of Competition. "Especially noteworthy is our action in the Rocky Mountain region where divestitures will maintain competition in the gasoline refining market."

On November 18, 2001, Phillips and Conoco agreed to merge the two companies, with the combined firm to be known as ConocoPhillips. At that time, it was estimated that the value of the new corporation would be approximately $35 billion.

Parties to the Transaction

Headquartered in Bartlesville, Oklahoma, Phillips is an integrated oil company engaged in the worldwide exploration, production, and transportation of crude oil and natural gas; the gathering of natural gas; the fractionation of raw mix into certain products; refining, marketing, and transportation of petroleum products; and the production and marketing of chemicals. Phillips has approximately 10 percent of the nation's refining capacity and has about nine percent of the nation's gasoline sales. In 2001 it had revenues of $47.7 billion.

Phillips has significant terminal facilities that it uses to distribute gasoline and other petroleum products. It owns or licenses several gas brands which are sold at approximately 11,700 stations throughout the United States. Phillips owns approximately 1,700 outlets in the Mid-Atlantic and Northeastern United States, where gas is sold under the Exxon and Mobil brands. Of the 10,000 remaining outlets, most are owned and operated by independent marketers and dealers. Phillips also owns slightly more than 30 percent of Duke Energy Field Services, LLC (DEFS), a significant natural gas gatherer, and has interests in many fractionation facilities nationwide.

Conoco, headquartered in Houston, Texas, is also a fully integrated petroleum company engaged in the worldwide exploration, production, and transportation of crude oil and natural gas; gathering of natural gas; fractionation; and refining, marketing, and transportation of petroleum products. In 2001, the company had revenues of $39.5 billion. Conoco has approximately three percent of the nation's refining capacity and three percent of the gas sales in the United States. Conoco owns petroleum product terminals throughout the nation, with its branded gasoline sold at approximately 5,000 stations, most of which are in the Southeast, Southwest, Mid-continent, and Rocky Mountain regions. Most of these stations are owned and operated by independent distributors and dealers.

The Commission's Complaint

According to the Commission's complaint, the merger of Phillips and Conoco as proposed would violate both Section 5 of the FTC Act and Section 7 of the Clayton Act by illegally lessening competition in the following markets: 1) the bulk supply of light petroleum products in Eastern Colorado and Northern Utah; 2) light petroleum product terminaling services in the metropolitan statistical areas (MSAs) of Spokane, Washington, and Wichita, Kansas; 3) the bulk supply of propane in Southern Missouri, the St. Louis MSA, and Southern Illinois; 4) natural gas gathering in more than 50 sections of the Permian Basin in New Mexico and Texas; and 5) the fractionation processes in Mont Belvieu, Texas.

In each of the markets described above, the FTC's complaint contends that the combination of Phillips and Conoco would allow the new firm to raise prices unilaterally or in combination with other companies and that entry into the relevant markets would be untimely, unlikely, and insufficient to deter or counteract the anticompetitive effects that may result from the merger.

Terms of the Proposed Consent

Under the terms of the proposed order, the companies would be required to: 1) divest the Phillips refinery in Woods Cross, Utah, and all of Phillips' related marketing assets served by that refinery; 2) divest Conoco's Denver refinery in Commerce City, Colorado, and all of Phillips' marketing assets in Eastern Colorado; 3) divest Phillips' light petroleum products terminal in Spokane, Washington; 4) enter into a petroleum products throughput agreement with another terminal services firm that includes an option to buy a 50 percent undivided interest in Phillips' Wichita, Kansas, light petroleum products terminal; 5) divest Phillips' propane terminal assets in Jefferson City, Missouri, and East St. Louis, Illinois, and provide a long-term propane supply agreement; 6) divest certain Conoco natural gas gathering assets in Chavez, Lea, and Eddy Counties in New Mexico, along with Conoco's Maljamar processing facility and natural gas gathering assets in Schleicher County, Texas, and enter into a long-term agreement to process natural gas gathered in Texas; and 7) create firewalls that prevent the transfer of competitively sensitive information among the Mont Belvieu fractionators.

The Analysis of the Proposed Consent Order to Aid Public Comment, which is available on the FTC's Web site as a link to this press release, describes in detail the specific products and services to be divested in each of the asset categories above, related brand licensing agreements and their terms and geographic coverage, the time frame in which the divestitures be completed, and whether prior Commission notification of the proposed buyer would be required. The Analysis also notes that the order would require the companies to maintain the viability and marketability of the assets until they are divested. Finally, for certain divestitures, the Analysis details actions that the order requires the companies take if they are unable to find a Commission-approved buyer within the time allotted.

Also, under the terms of the proposed order, a trustee would be appointed if the companies fail to complete one or more of the required divestitures. The companies also would be required to provide the Commission with compliance reports every 60 days, until each of the divestitures is completed, and to notify the FTC with regard to any changes relevant to the terms of the order. The FTC would have access to the companies' facilities and employees to ensure they are complying with the order. In addition, if any state fails to approve the divestitures specified in the proposed order, the time period allowed for that divestiture would be extended for 90 days. The proposed order would expire 10 years after the date it is finalized by the Commission.

The vote to accept the proposed consent order and place a copy on the public record was 5-0. The proposed consent order will be subject to public comment for 30 days, until October 2, 2002, after which the Commission will determine whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, proposed consent order and an analysis to aid public comment are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of

Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No.: 021-0040)