UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

ConocoPhillips

Delaware		01-0562944
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

600 North Dairy Ashford, Houston, TX		77079
(Address of principal executive offices)		(Zip Code)

281-293-1000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ              Accelerated filer o              Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 1,634,399,909 shares of common stock, $.01 par value, outstanding at March 31, 2007.

 

 

CONOCOPHILLIPS

TABLE OF CONTENTS

		Page
Part I – Financial Information
Item 1. Financial Statements
Consolidated Income Statement			1
Consolidated Balance Sheet			2
Consolidated Statement of Cash Flows			3
Notes to Consolidated Financial Statements			4
Supplementary Information—Condensed Consolidating Financial Information			26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3. Quantitative and Qualitative Disclosures About Market Risk			58
Item 4. Controls and Procedures			58
Part II – Other Information
Item 1. Legal Proceedings			59
Item 1A. Risk Factors			61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			61
Item 6. Exhibits			62
Signature			63
First and Second Amendments to the Executive Severance Plan
Computation of Ratio of Earnings to Fixed Charges
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certifications Pursuant to Section 1350

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

Consolidated Income Statement		ConocoPhillips

		Millions of Dollars
		Three Months Ended
		March 31
		2007				2006
Revenues and Other Income
Sales and other operating revenues*		$	41,320				46,906
Equity in earnings of affiliates			929				960
Other income			618				61
Total Revenues and Other Income			42,867				47,927
Costs and Expenses
Purchased crude oil, natural gas and products			26,715				33,455
Production and operating expenses			2,492				2,215
Selling, general and administrative expenses			527				566
Exploration expenses			262				112
Depreciation, depletion and amortization			2,024				1,180
Impairments			(1	)			—
Taxes other than income taxes*			4,374				4,387
Accretion on discounted liabilities			79				60
Interest and debt expense			307				115
Foreign currency transaction losses			1				22
Minority interests			21				18
Total Costs and Expenses			36,801				42,130
Income before income taxes			6,066				5,797
Provision for income taxes			2,520				2,506
Net Income		$	3,546				3,291
Net Income Per Share of Common Stock (dollars)
Basic		$	2.15				2.38
Diluted			2.12				2.34
Dividends Paid Per Share of Common Stock (dollars)		$	.41				.36
Average Common Shares Outstanding (in thousands)
Basic			1,647,352				1,382,925
Diluted			1,668,847				1,404,704
* Includes excise taxes on petroleum products sales:		$	3,841				3,990
See Notes to Consolidated Financial Statements.

Consolidated Balance Sheet		ConocoPhillips

		Millions of Dollars
		March 31				December 31
		2007				2006
Assets
Cash and cash equivalents		$	860				817
Accounts and notes receivable (net of allowance of $43 million in 2007 and $45 million in 2006)			11,964				13,456
Accounts and notes receivable—related parties			1,936				650
Inventories			5,685				5,153
Prepaid expenses and other current assets			4,296				4,990
Total Current Assets			24,741				25,066
Investments and long-term receivables			30,415				19,595
Loans and advances—related parties			1,304				1,118
Net properties, plants and equipment			83,904				86,201
Goodwill			31,531				31,488
Intangibles			919				951
Other assets			395				362
Total Assets		$	173,209				164,781
Liabilities
Accounts payable		$	15,023				14,163
Accounts payable—related parties			1,735				471
Notes payable and long-term debt due within one year			1,707				4,043
Accrued income and other taxes			5,532				4,407
Employee benefit obligations			628				895
Other accruals			2,400				2,452
Total Current Liabilities			27,025				26,431
Long-term debt			21,961				23,091
Asset retirement obligations and accrued environmental costs			5,629				5,619
Joint venture acquisition obligation—related party			6,742				—
Deferred income taxes			20,051				20,074
Employee benefit obligations			3,567				3,667
Other liabilities and deferred credits			2,251				2,051
Total Liabilities			87,226				80,933
Minority Interests			1,201				1,202
Common Stockholders’ Equity
Common stock (2,500,000,000 shares authorized at $.01 par value) Issued (2007—1,708,876,039 shares; 2006—1,705,502,609 shares)
Par value			17				17
Capital in excess of par			42,052				41,926
Grantor trusts (at cost: 2007—44,285,475 shares; 2006—44,358,585 shares)			(762	)			(766	)
Treasury stock (at cost: 2007—30,190,655 shares; 2006—15,061,613 shares)			(1,969	)			(964	)
Accumulated other comprehensive income			1,437				1,289
Unearned employee compensation			(143	)			(148	)
Retained earnings			44,150				41,292
Total Common Stockholders’ Equity			84,782				82,646
Total		$	173,209				164,781

See Notes to Consolidated Financial Statements.

Consolidated Statement of Cash Flows		ConocoPhillips

		Millions of Dollars
		Three Months Ended
		March 31
		2007				2006
Cash Flows From Operating Activities
Net income		$	3,546				3,291
Adjustments to reconcile net income to net cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and amortization			2,024				1,180
Impairments			(1	)			—
Dry hole costs and leasehold impairments			148				38
Accretion on discounted liabilities			79				60
Deferred taxes			77				168
Undistributed equity earnings			(557	)			(67	)
Gain on asset dispositions			(499	)			(3	)
Other			(94	)			(203	)
Working capital adjustments
Decrease in accounts and notes receivable			289				550
Increase in inventories			(686	)			(1,304	)
Decrease in prepaid expenses and other current assets			67				—
Increase in accounts payable			1,539				108
Increase in taxes and other accruals			941				982
Net Cash Provided by Operating Activities			6,873				4,800
Cash Flows From Investing Activities
Acquisition of Burlington Resources Inc.*			—				(14,190	)
Capital expenditures and investments, including dry hole costs*			(2,847	)			(4,514	)
Proceeds from asset dispositions			1,343				5
Long-term advances/loans to affiliates			(179	)			(126	)
Collection of advances/loans to affiliates			28				11
Other			7				—
Net Cash Used in Investing Activities			(1,648	)			(18,814	)
Cash Flows From Financing Activities
Issuance of debt			81				15,340
Repayment of debt			(3,572	)			(16	)
Issuance of company common stock			40				40
Repurchase of company common stock			(1,000	)			—
Dividends paid on company common stock			(674	)			(496	)
Other			(49	)			(27	)
Net Cash Provided by (Used in) Financing Activities			(5,174	)			14,841
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(8	)			(33	)
Net Change in Cash and Cash Equivalents			43				794
Cash and cash equivalents at beginning of period			817				2,214
Cash and Cash Equivalents at End of Period		$	860				3,008

* Net of cash acquired.

See Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements		ConocoPhillips

Note 1—Interim Financial Information

The interim-period financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments, in the opinion of management, necessary for a fair presentation of the consolidated financial position of ConocoPhillips and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature. The acquisition of Burlington Resources Inc. was reflected in our balance sheet beginning at March 31, 2006, and was reflected in our results of operations beginning April 1, 2006.

To enhance your understanding of these interim financial statements, see the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.

Note 2—Accounting Policies

Revenue Recognition

Effective April 1, 2006, we implemented Emerging Issues Task Force Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Issue No. 04-13 requires purchases and sales of inventory with the same counterparty and entered into “in contemplation” of one another to be combined and reported net (i.e., on the same income statement line). Exceptions to this are exchanges of finished goods for raw materials or work-in-progress within the same line of business, which are only reported net if the transaction lacks economic substance. The implementation of Issue No. 04-13 did not have a material impact on net income.

The table below shows the actual three months ended March 31, 2007, sales and other operating revenues, and purchased crude oil, natural gas and products under Issue No. 04-13, and the respective pro forma amounts had this new guidance been effective for the period included in this report prior to April 1, 2006.

		Millions of Dollars
		Three Months Ended
		March 31
		Actual				Pro Forma
		2007				2006
Sales and other operating revenues		$	41,320				40,249
Purchased crude oil, natural gas and products			26,715				26,798

Note 3—Changes in Accounting Principles

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). This Interpretation provides guidance on recognition, classification and disclosure concerning uncertain tax liabilities. The evaluation of a tax position requires recognition of a tax benefit if it is more likely than not it will be sustained upon examination. We adopted this Interpretation effective January 1, 2007. The adoption did not have a material impact on our consolidated financial statements.

At January 1, 2007, we had unrecognized tax benefits of $912 million. Included in this balance was $537 million which, if recognized, would affect our effective tax rate.

We and our subsidiaries file tax returns in the U.S. Federal jurisdiction and in many foreign and state jurisdictions. Audits in major jurisdictions, including the United States, Canada, Norway and the United Kingdom, are generally complete through 2001. Issues in dispute from audited years and audits for subsequent years are ongoing and in various stages of completion in the many jurisdictions in which we operate around the world.

We recognize accrued interest related to unrecognized tax benefits in interest expense, and penalties in operating expense. Accrued liabilities for interest and penalties as of January 1, 2007, totaled $99 million, net of accrued income taxes.

Note 4—Acquisition of Burlington Resources Inc.

On March 31, 2006, ConocoPhillips completed the $33.9 billion acquisition of Burlington Resources Inc., an independent exploration and production company that held a substantial position in North American natural gas proved reserves, production and exploratory acreage.

The final allocation of the purchase price to specific assets and liabilities was completed in the first quarter of 2007. It was based on the final outside appraisal of the fair value of Burlington Resources long-lived assets and the conclusion of the fair value determination of all other Burlington Resources assets and liabilities.

The following table summarizes the final purchase price allocation of the fair value of the assets acquired and liabilities assumed as of March 31, 2006:

		Millions
		of Dollars
Cash and cash equivalents		$	3,238
Accounts and notes receivable			1,476
Inventories			229
Prepaid expenses and other current assets			108
Investments and long-term receivables			268
Properties, plants and equipment			28,176
Goodwill			16,789
Intangibles			107
Other assets			46
Total Assets		$	50,437
Accounts payable		$	1,487
Notes payable and long-term debt due within one year			1,009
Accrued income and other taxes			762
Employee benefit obligations—current			248
Other accruals			254
Long-term debt			3,330
Asset retirement obligations			730
Accrued environmental costs			174
Deferred income taxes			7,835
Employee benefit obligations			347
Other liabilities and deferred credits			397
Common stockholders’ equity			33,864
Total Liabilities and Equity		$	50,437

All of the goodwill was assigned to the Worldwide Exploration and Production reporting unit. Of the $16,789 million of goodwill, $7,939 million relates to net deferred tax liabilities arising from differences between the allocated financial bases and deductible tax bases of the acquired assets. None of the goodwill is deductible for tax purposes.

The following table presents pro forma information for the three months ended March 31, 2006, as if the acquisition had occurred at the beginning of 2006.

		Millions
		of Dollars
Pro Forma
Sales and other operating revenues		$	48,811
Net income			3,746
Net income per share of common stock (dollars)
Basic			2.27
Diluted			2.23

The pro forma information is not intended to reflect the actual results that would have occurred if the companies had been combined during the period presented, nor is it intended to be indicative of the results of operations that may be achieved by ConocoPhillips in the future.

Note 5—Restructuring

In connection with the acquisition of Burlington Resources, we implemented a restructuring program as part of the effort to capture the synergies of combining the two companies. Under this program, we recorded accruals totaling $230 million in 2006 for employee severance payments, site closings, incremental pension benefit costs associated with workforce reductions, and employee relocations. Approximately 600 positions were identified for elimination, most of which were in the United States.

Of the total accrual, $224 million was reflected in the Burlington Resources purchase price allocation as an assumed liability, and $6 million related to ConocoPhillips was reflected in selling, general and administrative expenses in 2006. The following table summarizes activity related to the non-pension portion of the accrual in the first quarter of 2007:

		Millions
		of Dollars
Balance at December 31, 2006		$	120
Benefit payments			(26	)
Adjustments			10
Balance at March 31, 2007*		$	104

* Includes current liabilities of $64 million. All workforce reductions are expected to be completed by March 2008. Some costs for site closings, continuation of employee benefits, and employee relocations are expected to extend beyond one year.

Note 6—Variable Interest Entities (VIEs)

In June 2005, ConocoPhillips and OAO LUKOIL (LUKOIL) created the OOO Naryanmarneftegaz (NMNG) joint venture to develop resources in the Timan-Pechora province of Russia. The NMNG joint venture is a VIE, but we are not the primary beneficiary. We use the equity method of accounting for this investment. At March 31, 2007, the book value of our investment in the venture was $1,111 million.

In 1997, Phillips 66 Capital II (Trust II) was created for the sole purpose of issuing mandatorily redeemable preferred securities to third-party investors and investing the proceeds thereof in an approximate amount of subordinated debt securities of ConocoPhillips. At December 31, 2006, we reported debt of $361 million of 8% Junior Subordinated Deferrable Interest Debentures due 2037. Trust II is a VIE, but we do not consolidate it in our financial statements because we are not the primary beneficiary. Effective January 15, 2007, we redeemed the 8% Junior Subordinated Deferrable Interest Debentures due 2037 at a premium of $14 million, plus accrued interest. Upon redemption of the Debentures, Trust II was liquidated. See Note 12—Debt, for additional information about Trust II.

Note 7—Inventories

Inventories consisted of the following:

		Millions of Dollars
		March 31				December 31
		2007				2006
Crude oil and petroleum products		$	4,921				4,351
Materials, supplies and other			764				802
		$	5,685				5,153

Inventories valued on the last-in, first-out (LIFO) basis totaled $4,684 million and $4,043 million at March 31, 2007, and December 31, 2006, respectively. The remainder of our inventories is valued under various methods, including first-in, first-out and weighted average. The excess of current replacement cost over LIFO cost of inventories amounted to $4,495 million and $4,178 million at March 31, 2007, and December 31, 2006, respectively.

Note 8—Assets Held for Sale

In 2006, we commenced asset rationalization efforts that led to the classification of certain assets as “held for sale” under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, at December 31, 2006, we reclassified $3,051 million of non-current assets and $604 million of non-current liabilities into current assets and current liabilities, respectively.

During the first quarter of 2007, a portion of these held-for-sale assets were sold, and additional assets met the held-for-sale criteria. As a result, at March 31, 2007, we had classified $2,358 million of non-current assets as “Prepaid expenses and other current assets” on our consolidated balance sheet and we had classified $287 million of non-current liabilities as current liabilities, consisting of $102 million in “Accrued income and other taxes” and $185 million in “Other accruals.”

The major classes of non-current assets and non-current liabilities held for sale at March 31, 2007, reclassified to current were:

		Millions
		of Dollars
Assets
Investments and long-term receivables		$	156
Net properties, plants and equipment			1,806
Goodwill			255
Intangibles			13
Other assets			128
Total assets reclassified		$	2,358
Exploration and Production (E&P)		$	451
Refining and Marketing (R&M)			1,907
		$	2,358
Liabilities
Asset retirement obligations and accrued environmental costs		$	168
Deferred income taxes			102
Other liabilities and deferred credits			17
Total liabilities reclassified		$	287
E&P		$	103
R&M			184
		$	287

Note 9—Investments and Long-Term Receivables

EnCana Business Ventures

In October 2006, we announced a business venture with EnCana Corporation (EnCana) to create an integrated North American heavy-oil business. The transaction closed on January 3, 2007. The venture consists of two 50/50 operating business ventures, a Canadian upstream general partnership, FCCL Oil Sands Partnership (FCCL), and a U.S. downstream limited liability company, WRB Refining LLC (WRB). We use the equity method of accounting for both business ventures, with the operating results of our investment in FCCL reflecting its use of the full-cost method of accounting for oil and gas exploration and development activities.

FCCL’s operating assets consist of the Foster Creek and Christina Lake steam-assisted gravity drainage bitumen projects, both located in the eastern flank of the Athabasca oil sands in northeast Alberta. EnCana is the operator and managing partner of FCCL. We are obligated to contribute $7.5 billion, plus accrued interest, to FCCL over a 10-year period beginning in 2007. For additional information on this obligation, see Note 18—Joint Venture Acquisition Obligation.

WRB’s operating assets consist of the Wood River and Borger refineries, located in Roxana, Illinois, and Borger, Texas, respectively. As a result of our contribution of these two assets to the business venture, we recognized a basis difference of $5.0 billion based on the fair value of the contributed assets compared to their historic book value. The difference will be amortized and recognized as a benefit evenly over a period of 25 years starting from the closing date. This business venture plans to expand heavy-oil processing capacity at these facilities from 60,000 barrels per day to approximately 550,000 barrels per day by 2015. Total crude oil throughput at these two facilities is expected to increase from the current

452,000 barrels per day to approximately 600,000 barrels per day over the same time period. We are the operator and managing partner of WRB. EnCana is obligated to contribute $7.5 billion, plus accrued interest, to WRB over a 10-year period beginning in 2007. For the Wood River refinery, operating results are shared 50/50 starting upon formation. For the Borger refinery, we are entitled to 85 percent of the operating results in 2007, 65 percent in 2008, and 50 percent in all years thereafter.

LUKOIL

Our ownership interest in LUKOIL was 20 percent at March 31, 2007, based on 851 million shares authorized and issued. For financial reporting under U.S. generally accepted accounting principles, treasury shares held by LUKOIL are not considered outstanding for determining our equity-method ownership interest in LUKOIL. Our ownership interest, based on estimated shares outstanding, was 20.6 percent at March 31, 2007.

At March 31, 2007, the book value of our ordinary share investment in LUKOIL was $9,832 million. Our share of the net assets of LUKOIL was estimated to be $7,114 million. This basis difference of $2,718 million is primarily being amortized on a unit-of-production basis. On March 31, 2007, the closing price of LUKOIL shares on the London Stock Exchange was $86.50 per share, making the total market value of our LUKOIL investment $14,715 million.

Loans to Related Parties

As part of our normal ongoing business operations and consistent with industry practice, we invest and enter into numerous agreements with other parties to pursue business opportunities, which share costs and apportion risks among the parties as governed by the agreements. Included in such activity are loans made to certain affiliated companies. Significant loans to affiliated companies at March 31, 2007, included the following:

	•		$560 million in loan financing, including accrued interest, to Freeport LNG for the construction of an LNG facility. We expect to provide loan financing of approximately $630 million for the construction of the facility.
	•		$234 million in loan financing, including accrued interest, to Varandey Terminal Company associated with the costs of a terminal expansion. We expect our total obligation for the terminal expansion to be approximately $465 million at current exchange rates, including interest to be accrued during construction.
	•		$473 million of project financing, including accrued interest, to Qatargas 3, an integrated project to produce and liquefy natural gas from Qatar’s North field. Our maximum exposure to this financing structure is $1.2 billion.

Note 10—Properties, Plants and Equipment

The company’s investment in properties, plants and equipment (PP&E), with accumulated depreciation, depletion and amortization (Accum. DD&A), was:

		Millions of Dollars
		March 31, 2007												December 31, 2006
		Gross				Accum.				Net				Gross				Accum.				Net
		PP&E				DD&A				PP&E				PP&E				DD&A				PP&E
E&P		$	90,626				22,915				67,711				88,592				21,102				67,490
Midstream			330				160				170				330				157				173
R&M			18,487				4,047				14,440				22,115				5,199				16,916
LUKOIL Investment			—				—				—				—				—				—
Chemicals			—				—				—				—				—				—
Emerging Businesses			1,035				107				928				1,006				98				908
Corporate and Other			1,276				621				655				1,229				515				714
		$	111,754				27,850				83,904				113,272				27,071				86,201

Suspended Wells

The following table reflects the net changes in suspended exploratory well costs during the first three months of 2007:

		Millions of Dollars
		Three Months Ended
		March 31, 2007
Beginning balance at January 1		$	537
Additions pending the determination of proved reserves			40
Reclassifications to proved properties			(13	)
Charged to dry hole expense			—
Ending balance at March 31		$	564

The following table provides an aging of suspended well balances at March 31, 2007, and December 31, 2006:

		Millions of Dollars
		March 31				December 31
		2007				2006
Exploratory well costs capitalized for a period of one year or less		$	207				225
Exploratory well costs capitalized for a period greater than one year			357				312
Ending balance		$	564				537
Number of projects that have exploratory well costs that have been capitalized for a period greater than one year			28				22

The following table provides a further aging of those exploratory well costs that have been capitalized for more than one year after drilling is completed, as of March 31, 2007:

		Millions of Dollars
						Suspended Since
Project		Total				2006				2005				2004				2003				2002				2001
Alpine satellite—Alaska (2)		$	21				—				—				—				—				21				—
Kashagan—Kazakhstan (1)			18				—				—				—				9				—				9
Aktote—Kazakhstan (2)			19				—				—				7				12				—				—
Kairan—Kazakhstan (1)			13				—				—				13				—				—				—
Gumusut—Malaysia (2)			30				—				6				11				13				—				—
Malikai—Malaysia (2)			29				—				19				10				—				—				—
Plataforma Deltana—Venezuela (2)			21				—				6				15				—				—				—
Hejre—Denmark (3)			22				—				14				—				—				—				8
Uge—Nigeria (1)			16				—				16				—				—				—				—
Su Tu Trang—Vietnam (2)			22				7				7				—				8				—				—
Caldita—Australia (1)			33				—				33				—				—				—				—
Enochdhu/Finlaggen—UK (1)			11				11				—				—				—				—				—
Humphrey—UK (2)			12				12				—				—				—				—				—
Fifteen projects of less than $10 million each (1)(2)			90				26				40				4				11				9				—
Total of 28 projects		$	357				56				141				60				53				30				17

(1)		Additional appraisal wells planned.
(2)		Appraisal drilling complete; costs being incurred to assess development.
(3)		This amount is included in assets held for sale.

Note 11—Impairments

During the first quarter of 2007, we recognized the following net impairments:

		Millions of Dollars
		Three Months Ended
		March 31
		2007				2006
Asset write-downs
E&P—International		$	94				—
R&M—United States			33				—
Increase in fair value of previously impaired assets—R&M			(128	)			—
		$	(1	)			—

In the first quarter of 2007, we recorded PP&E impairments of $94 million associated with planned asset dispositions in the E&P segment, reflecting write-downs of assets to fair value less cost to sell.

In the R&M segment, we also recorded impairments of PP&E of $33 million associated with planned asset dispositions in the first quarter of 2007. In addition and in accordance with SFAS No. 144, “Accounting

for the Impairment or Disposal of Long-Lived Assets,” we recognized a $128 million gain for a subsequent increase in the fair value of certain assets impaired in the prior year to reflect finalized sales agreements. This gain was netted with write-downs into the “Impairments” line of the consolidated income statement.

Note 12—Debt

At March 31, 2007, we had two revolving credit facilities totaling $5 billion that expire in October 2011. Also, we had a $2.5 billion revolving credit facility that originally expired in April 2011. The term of this facility has recently been extended to expire April 2012 at a reduced commitment level of $2.3 billion during the one-year extension period. These facilities may be used as direct bank borrowings, as support for the ConocoPhillips $7.5 billion commercial paper program, as support for the ConocoPhillips Qatar Funding Ltd. $1.5 billion commercial paper program, or as support for issuances of letters of credit totaling up to $750 million. The facilities are broadly syndicated among financial institutions and do not contain any material adverse change provisions or covenants requiring maintenance of specified financial ratios or ratings. The credit facilities contain a cross-default provision relating to our, or any of our consolidated subsidiaries’, failure to pay principal or interest on other debt obligations of $200 million or more. At March 31, 2007 and December 31, 2006, we had no outstanding borrowings under these credit facilities, but $41 million in letters of credit had been issued at both dates. Under both commercial paper programs there was $1,006 million of commercial paper outstanding at March 31, 2007, compared with $2,931 million at December 31, 2006.

At March 31, 2007, we had classified approximately $400 million of short-term debt as long-term debt, based on our ability and intent to refinance the obligation on a long-term basis under our revolving credit facilities.

At December 31, 2006, Phillips 66 Capital II (Trust II) had outstanding $350 million of 8% Capital Securities (Capital Securities). The sole asset of Trust II was $361 million of the company’s 8% Junior Subordinated Deferrable Interest Debentures due 2037 (Subordinated Debt Securities II). Effective January 15, 2007, we redeemed the Subordinated Debt Securities II at a premium of $14 million, plus accrued interest, resulting in the immediate redemption of the Capital Securities.

Also, in January 2007, we redeemed our $153 million 7.25% Notes due 2007 upon their maturity, and in February 2007, we reduced our Floating Rate Five-Year Term Note due 2011 from $5 billion to $4 billion.

In April 2007, we redeemed our $1 billion Floating Rate Notes due 2007 upon their maturity through the issuance of commercial paper.

Note 13—Contingencies and Commitments

In the case of all known non-income-tax-related contingencies, we accrue a liability when the loss is probable and the amount is reasonably estimable. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48), effective January 1, 2007. FIN 48 requires a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain. See Note 3—Changes in Accounting Principles, for additional information.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Environmental

We are subject to federal, state and local environmental laws and regulations. These may result in obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various sites. When we prepare our financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into consideration the likely effects of societal and economic factors. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities and we accrue them in the period that they are both probable and reasonably estimable.

Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we could be responsible for all of the cleanup costs related to any site at which we have been designated as a potentially responsible party. If we were solely responsible, the costs, in some cases, could be material to our, or one of our segments’, results of operations, capital resources or liquidity. However, settlements and costs incurred in matters that previously have been resolved have not been material to our results of operations or financial condition. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability and adjust our accruals accordingly.

As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit and some of the indemnifications are subject to dollar limits and time limits. We have not recorded accruals for any potential contingent liabilities that we expect to be funded by the prior owners under these indemnifications.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except for those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable that future costs will be incurred and these costs can be reasonably estimated. At March 31, 2007, our balance sheet included a total environmental accrual of $1,000 million, compared with

$1,062 million at December 31, 2006. We expect to incur the majority of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

Legal Proceedings

Our legal department applies its knowledge, experience, and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases. This process also enables us to track those cases which have been scheduled for trial, as well as the pace of settlement discussions in individual matters. Based on our professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal department believes there is only a remote likelihood that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our financial statements.

Other Contingencies

We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized. In addition, at March 31, 2007, we had performance obligations secured by letters of credit totaling $1,042 million (of which $41 million was issued under the provisions of our revolving credit facilities, and the remainder was issued as direct bank letters of credit) and various purchase commitments for materials, supplies, services and items of permanent investment incident to the ordinary conduct of business.

Venezuela

On January 31, 2007, Venezuela’s National Assembly passed a law allowing the president of Venezuela to pass laws on certain matters by decree. On February 26, 2007, the president of Venezuela issued a decree (the Nationalization Decree) mandating a number of unilateral changes to the present contractual structures related to heavy-oil ventures and oil production risk contracts, including the following:

	•		The national oil company of Venezuela, Petróleos de Venezuela, S.A. (PDVSA) would be required to assume operational control of all assets subject to the decree effective May 1, 2007.
	•		All of the rights currently vested in the Orinoco Oil Belt heavy-oil Associations and oil production risk contract joint ventures, including the ones in which we currently participate, would be terminated and those rights vested in a number of Venezuelan-controlled Empresa Mixta legal entities.
	•		PDVSA would be required to hold a minimum 60 percent ownership interest in all of the newly formed Empresa Mixta legal entities.
	•		PDVSA would assume complete ownership of the heavy-oil projects and production risk contracts if agreements regarding the terms and conditions for reduced ownership interests under the Empresa Mixta entity structure are not reached by June 26, 2007.

The Nationalization Decree directly impacts our interests in each of the Petrozuata and Hamaca heavy-oil projects and the Corocoro oil production risk contract currently under development. Pursuant to the Nationalization Decree, PDVSA has assumed operational control of these three projects effective May 1, 2007, and ConocoPhillips cooperated with PDVSA, as required by the decree, to facilitate a safe and orderly transition of operations.

In the event we are able to reach agreement with respect to the takeover of these projects by the Empresa Mixta legal entities and assuming PDVSA takes a 60 percent interest under the terms of the Nationalization Decree and our ownership interest is reduced pro rata, our ownership interests in Petrozuata, Hamaca and Corocoro would decrease from 50.1 percent, 40.0 percent and 32.2 percent to 40.0 percent, 22.9 percent and 19.8 percent, respectively. If we are unable to reach an agreement, our ownership interests could be eliminated, potentially without any immediate compensation.

As a result, the ultimate impact of the Nationalization Decree, if fully implemented, on our results of operations and financial position is not determinable at this time, but could result in future reductions to our anticipated operating results, production volumes, and proved reserves and could lead to a material asset impairment charge. However, due to the indeterminable status of the outcome of negotiations presently under way, management has not concluded such an impairment of our investment and associated goodwill exists under U.S. generally accepted accounting principles. ConocoPhillips continues to preserve all of its rights under contracts, investment treaties, and international law and will continue to evaluate its options in realizing the value of its investments and operations in Venezuela.

The historical cost-based carrying value of our total investment in Venezuela was approximately $2.6 billion at March 31, 2007. Also, any sale or expropriation of our interests would be viewed as a partial disposition of our Worldwide Exploration and Production reporting unit and, under the guidance in SFAS No. 142, “Goodwill and Other Intangible Assets,” would require an allocation of goodwill to the sale or expropriation event. In the event of a sale or expropriation of our entire interest in Venezuela, we estimate approximately $1.9 billion of goodwill would be allocated to such an event. If only a partial sale or expropriation occurs, the amount of allocated goodwill would be proportionally reduced.

We believe the fair market value of our Venezuelan operations substantially exceeds the historical cost-based carrying value plus goodwill allocable to those operations. However, if compensation for our interests in Venezuela is less than the applicable carrying value plus allocable goodwill, we would record an impairment equal to the difference. Similarly, if we are unable to reach agreement in negotiations, we could record an impairment prior to pursuing our other rights, if the amount and collectibility of any future compensation is not certain.

At December 31, 2006, we had recorded 1,088 million barrels of oil equivalent of proved reserves related to Petrozuata and Hamaca, and first-quarter 2007 production from these two joint ventures, after application of disproportionate OPEC reductions imposed by the Venezuelan government, averaged 82,000 net barrels per day of crude oil. First-quarter 2007 net income attributable to our Venezuelan operations was $27 million.

Note 14—Guarantees

At March 31, 2007, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial.

Construction Completion Guarantees

	•		In June 2006, we issued a guarantee for 24 percent of the $2 billion in credit facilities of Rockies Express Pipeline LLC (Rockies Express), which will be used to construct a natural gas pipeline across a portion of the United States. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $480 million, which could become payable if the credit facility is fully utilized and Rockies Express fails to meet its obligations under the credit agreement. It is anticipated that construction completion will be achieved mid-2009, and refinancing will take place at that time, making the debt non-recourse. At March 31, 2007, the carrying value of the guarantee to third-party lenders was $11 million.
	•		In December 2005, we issued a construction completion guarantee for 30 percent of the $4.0 billion in loan facilities of Qatargas 3, which will be used to construct an LNG train in Qatar. Of the $4.0 billion in loan facilities, ConocoPhillips has committed to provide $1.2 billion. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $850 million, which could become payable if the full debt financing is utilized and completion of the Qatargas 3 project is not achieved. The project financing will be non-recourse upon certified completion, which is expected by December 31, 2009. At March 31, 2007, the carrying value of the guarantee to the third-party lenders was $11 million. For additional information, see Note 9—Investments, Loans and Long-Term Receivables.

Guarantees of Joint-Venture Debt

•

At March 31, 2007, we had guarantees outstanding for our portion of joint-venture debt obligations, which have terms of up to 17 years. The maximum potential amount of future payments under the guarantees is approximately $140 million. Payment would be required if a joint venture defaults on its debt obligations.

Other Guarantees

	•		The Merey Sweeny, L.P. (MSLP) joint-venture project agreement requires the partners in the venture to pay cash calls to cover operating expenses in the event the venture does not have enough cash to cover operating expenses after setting aside the amount required for debt service over the next 18 years. Although there is no maximum limit stated in the agreement, the intent is to cover short-term cash deficiencies should they occur. Our maximum potential future payments under the agreement are currently estimated to be $100 million, assuming such a shortfall exists at some point in the future due to an extended operational disruption.
	•		In February 2003, we entered into two agreements establishing separate guarantee facilities of $50 million each for two LNG ships. Subject to the terms of each such facility, we will be required to make payments should the charter revenue generated by the respective ship fall below certain specified minimum thresholds, and we will receive payments to the extent that such revenues exceed those thresholds. The net maximum future payments that we may have to make over the 20-year terms of the two agreements could be up to $100 million in total. To the extent we receive any such payments, our actual gross payments over the 20 years could exceed that amount. In the event either ship is sold or a total loss occurs, we also may have recourse to the sales or insurance proceeds to recoup payments made under the guarantee facilities.
	•		We have guarantees of the residual value of leased corporate aircraft. The maximum potential payment under these guarantees at March 31, 2007, was $200 million.
	•		We have other guarantees with maximum future potential payment amounts totaling $270 million, which consist primarily of dealer and jobber loan guarantees to support our marketing business, a guarantee to fund the short-term cash liquidity deficits of a lubricants joint venture, three small construction completion guarantees, a guarantee associated with a pending lawsuit, guarantees relating to the startup of a refining joint venture, and guarantees of the lease payment obligations of a

joint venture. The carrying amount recorded for these other guarantees, at March 31, 2007, was $50 million. These guarantees generally extend up to 15 years and payment would be required only if the dealer, jobber or lessee goes into default, if the lubricants or refining joint ventures have cash liquidity issues, if construction projects are not completed, if guaranteed parties default on lease payments, or if an adverse decision occurs in the pending lawsuit.

Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations and joint ventures and have sold several assets, including downstream and midstream assets, certain exploration and production assets, and downstream retail and wholesale sites that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, environmental liabilities, permits and licenses, employee claims, real estate indemnity against tenant defaults, and litigation. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for these indemnifications at March 31, 2007, was $459 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the carrying amount recorded were $285 million of environmental accruals for known contamination that is included in asset retirement obligations and accrued environmental costs at March 31, 2007. For additional information about environmental liabilities, see Note 13—Contingencies and Commitments.

Note 15—Financial Instruments and Derivative Contracts

Derivative assets and liabilities were:

		Millions of Dollars
		March 31				December 31
		2007				2006
Derivative Assets
Current		$	729				924
Long-term			97				82
		$	826				1,006
Derivative Liabilities
Current		$	662				681
Long-term			93				126
		$	755				807

These derivative assets and liabilities appear as prepaid expenses and other current assets, other assets, other accruals, or other liabilities and deferred credits on the balance sheet.

Note 16—Comprehensive Income

ConocoPhillips’ comprehensive income was as follows:

		Millions of Dollars
		Three Months Ended
		March 31
		2007				2006
Net income		$	3,546				3,291
After-tax changes in:
Defined benefit pension plans
Net prior service cost			5				—
Net actuarial loss			16				—
Non-sponsored plans			(3	)			—
Foreign currency translation adjustments			131				171
Hedging activities			(1	)			1
Comprehensive income		$	3,694				3,463

Accumulated other comprehensive income in the equity section of the balance sheet included:

		Millions of Dollars
		March 31 2007				December 31 2006
Defined benefit pension plans		$	(647	)			(665	)
Foreign currency translation adjustments			2,089				1,958
Deferred net hedging loss			(5	)			(4	)
Accumulated other comprehensive income		$	1,437				1,289

Note 17—Supplemental Cash Flow Information

		Millions of Dollars
		Three Months Ended
		March 31
		2007				2006
Non-Cash Investing and Financing Activities
Issuance of stock and options for the acquisition of Burlington Resources Inc.		$	—				16,386
Investment in an upstream business venture through issuance of an acquisition obligation			7,313				—
Investment in a downstream business venture through contribution of non-cash assets and liabilities			2,415				—
Cash Payments
Interest		$	115				12
Income taxes			1,199				1,393

Note 18—Joint Venture Acquisition Obligation

On January 3, 2007, we closed on the previously announced business venture with EnCana Corporation. As part of this transaction, we expect to add approximately 400 million barrels of oil equivalent to our proved reserves in 2007. In addition, we are obligated to contribute $7.5 billion, plus accrued interest, over a 10-year period, beginning in 2007, to the upstream business venture, FCCL Oil Sands Partnership, formed as a result of the transaction. An initial cash contribution of $188 million was made upon closing in January.

The remaining $7.3 billion acquisition obligation is reflected as a liability on our March 31, 2007, consolidated balance sheet. Of this principal obligation amount, approximately $570 million is short-term and is included in the “Accounts payable—related parties” line on our consolidated balance sheet. Principal and interest payments of $237 million will be made each quarter, beginning in the second quarter of 2007, and continuing until the balance is paid. In early April 2007, we made the principal and interest payment for the second quarter, reducing the remaining principal obligation to approximately $7.2 billion. The principal portion of these payments will be presented on our consolidated statement of cash flows as a financing activity. Interest accrues at a fixed annual rate of 5.3 percent on the unpaid principal balance.

Note 19—Employee Benefit Plans

Pension and Postretirement Plans

		Millions of Dollars
		Pension Benefits																Other Benefits
Three Months Ended		March 31																March 31
		2007								2006								2007				2006
		U.S.				Int’l.				U.S.				Int’l.
Components of Net Periodic Benefit Cost
Service cost		$	44				24				42				21				3				4
Interest cost			57				38				50				31				11				11
Expected return on plan assets			(51	)			(35	)			(40	)			(29	)			—				—
Amortization of prior service cost			3				2				2				2				3				5
Recognized net actuarial loss (gain)			15				11				22				10				(4	)			(4	)
Net periodic benefit costs		$	68				40				76				35				13				16

During the first three months of 2007, we contributed $109 million to our domestic qualified and non-qualified plans and $51 million to our international benefit plans. We currently expect to contribute $430 million to our domestic plans and $180 million to our international plans in 2007.

Note 20—Related Party Transactions

Significant transactions with related parties were:

		Millions of Dollars
		Three Months Ended
		March 31
		2007				2006
Operating revenues (a)		$	2,618				1,784
Purchases (b)			3,210				1,518
Operating expenses and selling, general and administrative expenses (c)			108				79
Net interest expense (d)			30				5

(a)		We sell natural gas to DCP Midstream and crude oil to the Malaysian Refining Company Sdn. Bhd (MRC), among others, for processing and marketing. Natural gas liquids, solvents and petrochemical feedstocks are sold to Chevron Phillips Chemical Company LLC (CPChem), gas oil and hydrogen feedstocks are sold to Excel Paralubes, and refined products are sold primarily to CFJ Properties and Getty Petroleum Marketing, Inc. (a subsidiary of LUKOIL). We also sell blendstock and other intermediate products to WRB Refining LLC, as well as natural gas and crude oil. In addition, we charge several of our affiliates, including CPChem, Merey Sweeny L.P. (MSLP), and Hamaca Holding LLC, for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.
(b)		We purchase refined products from WRB Refining. We purchase natural gas and natural gas liquids from DCP Midstream and CPChem for use in our refinery processes and other feedstocks from various affiliates. We purchase upgraded crude oil from Petrozuata C.A. and refined products from MRC. We also pay fees to various pipeline equity companies for transporting finished refined products and a price upgrade to MSLP for heavy crude processing. We purchase base oils and fuel products from Excel Paralubes for use in our refinery and specialty businesses.
(c)		We pay processing fees to various affiliates. Additionally, we pay crude oil transportation fees to pipeline equity companies.
(d)		We pay and/or receive interest to/from various affiliates, including FCCL Oil Sands Partnership.

Elimination amounts related to our equity percentage share of profit or loss on the above transactions were not material.

Note 21—Segment Disclosures and Related Information

We have organized our reporting structure based on the grouping of similar products and services, resulting in six operating segments:

	1)		E&P—This segment primarily explores for, produces and markets crude oil, natural gas and natural gas liquids on a worldwide basis. At March 31, 2007, our E&P operations were producing in the United States, Norway, the United Kingdom, the Netherlands, Canada, Nigeria, Venezuela, Ecuador, Argentina, offshore Timor Leste in the Timor Sea, Australia, China, Indonesia, Algeria, Libya, the United Arab Emirates, Vietnam, and Russia. The E&P segment’s U.S. and international operations are disclosed separately for reporting purposes.
	2)		Midstream—This segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, primarily in the United States and Trinidad. The Midstream segment primarily consists of our 50 percent equity investment in DCP Midstream.
	3)		R&M—This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia. At March 31, 2007, we owned or had an interest in 12 refineries in the United States, one in the United Kingdom, one in Ireland, one in Germany, and had equity interests in one refinery in Germany, two in the Czech Republic, and one in Malaysia. The R&M segment’s U.S. and international operations are disclosed separately for reporting purposes.
	4)		LUKOIL Investment—This segment represents our investment in the ordinary shares of LUKOIL, an international, integrated oil and gas company headquartered in Russia. At March 31, 2007, our ownership interest was 20 percent, based on authorized and issued shares, and 20.6 percent, based on estimated shares outstanding.
	5)		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.
	6)		Emerging Businesses—The Emerging Businesses segment represents our investment in new technologies or businesses outside our normal scope of operations. Activities within this segment are currently focused on power generation; carbon-to-liquids; technology solutions, such as sulfur removal technologies; and alternative energy and programs, such as advanced hydrocarbon processes, energy conversion technologies, new petroleum-based products, and renewable fuels.

Corporate and Other includes general corporate overhead, interest income and expense, restructuring charges, and various other corporate activities. Corporate assets include all cash and cash equivalents.

We evaluate performance and allocate resources based on net income. Intersegment sales are at prices that approximate market.

See Note 2—Accounting Policies, for information affecting the comparability of sales and other operating revenues presented in the following tables of our segment disclosures.

Analysis of Results by Operating Segment

		Millions of Dollars
		Three Months Ended
		March 31
		2007				2006
Sales and Other Operating Revenues
E&P
United States		$	8,272				9,319
International			6,013				7,444
Intersegment eliminations—U.S.			(1,156	)			(1,205	)
Intersegment eliminations—international			(1,441	)			(1,254	)
E&P			11,688				14,304
Midstream
Total sales			1,105				1,021
Intersegment eliminations			(59	)			(284	)
Midstream			1,046				737
R&M
United States			20,039				23,541
International			8,635				8,356
Intersegment eliminations—U.S.			(144	)			(200	)
Intersegment eliminations—international			(2	)			(4	)
R&M			28,528				31,693
LUKOIL Investment			—				—
Chemicals			3				3
Emerging Businesses
Total sales			169				181
Intersegment eliminations			(114	)			(124	)
Emerging Businesses			55				57
Corporate and Other			—				—
Other adjustments*			—				112
Consolidated sales and other operating revenues		$	41,320				46,906

* Sales and other operating revenues for 2006 in the Emerging Businesses segment have been restated to reflect intersegment eliminations on sales from the Immingham power plant (Emerging Businesses segment) to the Humber refinery (R&M segment). Since these amounts were not material to the consolidated income statement, the “Other adjustments” line above is required to reconcile the restated Emerging Businesses revenues to the consolidated income statement.

Net Income (Loss)
E&P
United States		$	916				1,181
International			1,413				1,372
Total E&P			2,329				2,553
Midstream			85				110
R&M
United States			896				297
International			240				93
Total R&M			1,136				390
LUKOIL Investment			256				249
Chemicals			82				149
Emerging Businesses			(1	)			8
Corporate and Other			(341	)			(168	)
Consolidated net income		$	3,546				3,291

		Millions of Dollars
		March 31				December 31
		2007				2006
Total Assets
E&P
United States		$	35,167				35,523
International			54,945				48,143
Goodwill			27,750				27,712
Total E&P			117,862				111,378
Midstream			1,956				2,045
R&M
United States			24,284				22,936
International			9,880				9,135
Goodwill			3,781				3,776
Total R&M			37,945				35,847
LUKOIL Investment			9,832				9,564
Chemicals			2,293				2,379
Emerging Businesses			996				977
Corporate and Other			2,325				2,591
Consolidated total assets		$	173,209				164,781

Note 22—Income Taxes

Our effective tax rates for the first quarters of 2007 and 2006 were 42 percent and 43 percent, respectively. The change in the effective tax rate for the first quarter of 2007, versus the same period of 2006, was primarily due to the effect of our asset rationalization efforts, partially offset by a higher proportion of income in higher tax rate jurisdictions. The effective tax rate in excess of the domestic federal statutory rate of 35 percent was primarily due to foreign taxes.

Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” See Note 3—Changes in Accounting Principles, for additional information.

Note 23—New Accounting Standards

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This Statement permits an entity to choose to measure financial instruments and certain other items similar to financial instruments at fair value. All subsequent changes in fair value for the financial instrument would be reported in earnings. By electing the fair value option, an entity can also achieve consistent accounting for related assets and liabilities without having to apply complex hedge accounting. This Statement is effective January 1, 2008. We are currently evaluating the impact on our consolidated financial statements.

Supplementary Information—Condensed Consolidating Financial Information

We have various cross guarantees among ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to publicly held debt securities. ConocoPhillips Company is wholly owned by ConocoPhillips. ConocoPhillips Australia Funding Company is an indirect, wholly owned subsidiary of ConocoPhillips Company. ConocoPhillips Canada Funding Company I and ConocoPhillips Canada Funding Company II are indirect, wholly owned subsidiaries of ConocoPhillips. ConocoPhillips and ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to their publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, ConocoPhillips Company has fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. Conoco Funding Company, a wholly owned Nova Scotia finance subsidiary, also has senior unsecured debt securities fully and unconditionally guaranteed by ConocoPhillips. All guarantees are joint and several. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

	•		ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
	•		All other non-guarantor subsidiaries of ConocoPhillips.
	•		The consolidating adjustments necessary to present ConocoPhillips’ results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.

		Millions of Dollars
		Three Months Ended March 31, 2007
										ConocoPhillips
										Australia				ConocoPhillips				ConocoPhillips
						ConocoPhillips				Funding				Canada Funding				Canada Funding				All Other				Consolidating				Total
Income Statement		ConocoPhillips				Company				Company				Company I				Company II				Subsidiaries				Adjustments				Consolidated
Revenues and Other Income
Sales and other operating revenues		$	—				25,977				—				—				—				15,343				—				41,320
Equity in earnings of affiliates			3,563				3,022				—				—				—				545				(6,201	)			929
Other income			—				(110	)			—				—				—				728				—				618
Intercompany revenues			89				698				30				19				12				3,813				(4,661	)			—
Total Revenues and Other Income			3,652				29,587				30				19				12				20,429				(10,862	)			42,867
Costs and Expenses
Purchased crude oil, natural gas and products			—				22,022				—				—				—				8,631				(3,938	)			26,715
Production and operating expenses			—				1,108				—				—				—				1,427				(43	)			2,492
Selling, general and administrative expenses			3				291				—				—				—				229				4				527
Exploration expenses			—				22				—				—				—				240				—				262
Depreciation, depletion and amortization			—				362				—				—				—				1,662				—				2,024
Impairments			—				(24	)			—				—				—				23				—				(1	)
Taxes other than income taxes			—				1,503				—				—				—				2,938				(67	)			4,374
Accretion on discounted liabilities			—				14				—				—				—				65				—				79
Interest and debt expense			112				355				28				19				13				397				(617	)			307
Foreign currency transaction (gains) losses			—				—				—				7				10				(16	)			—				1
Minority interests			—				—				—				—				—				21				—				21
Total Costs and Expenses			115				25,653				28				26				23				15,617				(4,661	)			36,801
Income before income taxes			3,537				3,934				2				(7	)			(11	)			4,812				(6,201	)			6,066
Provision for income taxes			(9	)			584				1				(7	)			(8	)			1,959				—				2,520
Net Income (Loss)		$	3,546				3,350				1				—				(3	)			2,853				(6,201	)			3,546

		Millions of Dollars
		Three Months Ended March 31, 2006
						ConocoPhillips				All Other				Consolidating				Total
Income Statement		ConocoPhillips				Company				Subsidiaries				Adjustments				Consolidated
Revenues and Other Income
Sales and other operating revenues		$	—				29,802				17,104				—				46,906
Equity in earnings of affiliates			3,323				2,811				735				(5,909	)			960
Other income			—				44				17				—				61
Intercompany revenues			—				562				2,462				(3,024	)			—
Total Revenues and Other Income			3,323				33,219				20,318				(8,933	)			47,927
Costs and Expenses
Purchased crude oil, natural gas and products			—				25,812				10,377				(2,734	)			33,455
Production and operating expenses			—				1,192				1,049				(26	)			2,215
Selling, general and administrative expenses			5				366				211				(16	)			566
Exploration expenses			—				14				98				—				112
Depreciation, depletion and amortization			—				415				765				—				1,180
Impairments			—				—				—				—				—
Taxes other than income taxes			—				1,448				3,003				(64	)			4,387
Accretion on discounted liabilities			—				14				46				—				60
Interest and debt expense			44				145				110				(184	)			115
Foreign currency transaction losses			—				—				22				—				22
Minority interests			—				—				18				—				18
Total Costs and Expenses			49				29,406				15,699				(3,024	)			42,130
Income before income taxes			3,274				3,813				4,619				(5,909	)			5,797
Provision for income taxes			(17	)			490				2,033				—				2,506
Net Income		$	3,291				3,323				2,586				(5,909	)			3,291

		Millions of Dollars
		At March 31, 2007
										ConocoPhillips
										Australia				ConocoPhillips				ConocoPhillips
						ConocoPhillips				Funding				Canada Funding				Canada Funding				All Other				Consolidating				Total
Balance Sheet		ConocoPhillips				Company				Company				Company I				Company II				Subsidiaries				Adjustments				Consolidated
Assets
Cash and cash equivalents		$	—				14				—				—				1				1,094				(249	)			860
Accounts and notes receivable			126				13,800				32				12				4				18,976				(19,050	)			13,900
Inventories			—				3,167				—				—				—				2,518				—				5,685
Prepaid expenses and other current assets			9				797				—				10				7				3,473				—				4,296
Total Current Assets			135				17,778				32				22				12				26,061				(19,299	)			24,741
Investments, loans and long-term receivables*			85,318				70,731				2,000				1,269				858				45,059				(173,516	)			31,719
Net properties, plants and equipment			—				16,813				—				—				—				67,083				8				83,904
Goodwill			—				15,010				—				—				—				16,521				—				31,531
Intangibles			—				828				—				—				—				91				—				919
Other assets			9				105				5				28				14				233				1				395
Total Assets		$	85,462				121,265				2,037				1,319				884				155,048				(192,806	)			173,209
Liabilities and Stockholders’ Equity
Accounts payable		$	16				19,056				—				7				4				16,725				(19,050	)			16,758
Notes payable and long-term debt due within one year			1,000				618				—				—				—				89				—				1,707
Accrued income and other taxes			—				1,257				—				(2	)			(3	)			4,194				86				5,532
Employee benefit obligations			—				341				—				—				—				287				—				628
Other accruals			63				743				34				33				23				1,504				—				2,400
Total Current Liabilities			1,079				22,015				34				38				24				22,799				(18,964	)			27,025
Long-term debt			5,926				5,419				1,999				1,250				848				6,519				—				21,961
Asset retirement obligations and accrued environmental costs			—				987				—				—				—				4,642				—				5,629
Joint venture acquisition obligation			—				—				—				—				—				6,742				—				6,742
Deferred income taxes			(3	)			2,943				—				14				5				17,075				17				20,051
Employee benefit obligations			—				2,332				—				—				—				1,235				—				3,567
Other liabilities and deferred credits*			28				33,205				—				—				—				27,953				(58,935	)			2,251
Total Liabilities			7,030				66,901				2,033				1,302				877				86,965				(77,882	)			87,226
Minority interests			—				(19	)			—				—				—				1,220				—				1,201
Retained earnings			37,628				26,278				4				29				23				30,816				(50,628	)			44,150
Other stockholders’ equity			40,804				28,105				—				(12	)			(16	)			36,047				(64,296	)			40,632
Total		$	85,462				121,265				2,037				1,319				884				155,048				(192,806	)			173,209