CONOCOPHILLIPS | 2013 | FY |

Note 19—Employee Benefit Plans

Pension and Postretirement Plans

In connection with the separation of the Downstream business in 2012, ConocoPhillips entered into an Employee Matters Agreement with Phillips 66, which provides that employees of Phillips 66 no longer participate in benefit plans sponsored or maintained by ConocoPhillips as of the separation date. Upon separation, the ConocoPhillips pension and postretirement plans transferred assets and obligations to the Phillips 66 plans resulting in a net decrease in sponsored pension and postretirement plan obligations of $1,127 million. Additionally, as a result of the transfer of unrecognized losses to Phillips 66, deferred income taxes and other comprehensive income decreased $335 million and $570 million, respectively.

For both U.S. and international pensions, the overall expected long-term rate of return is developed from the expected future return of each asset class, weighted by the expected allocation of pension assets to that asset class. We rely on a variety of independent market forecasts in developing the expected rate of return for each class of assets.

For our tax-qualified pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation, the accumulated benefit obligation, and the fair value of plan assets were $6,011 million, $5,393 million, and $5,151 million, respectively, at December 31, 2013, and $6,278 million, $5,602 million, and $4,537 million, respectively, at December 31, 2012.

For our unfunded nonqualified key employee supplemental pension plans, the projected benefit obligation and the accumulated benefit obligation were $581 million and $392 million, respectively, at December 31, 2013, and were $525 million and $382 million, respectively, at December 31, 2012.

We recognized pension settlement losses of $67 million in 2013, $181 million (including $24 million in discontinued operations) in 2012 and $21 million in 2011. In 2013 and 2012, lump-sum benefit payments from the U.S. qualified pension plan exceeded the sum of service and interest costs for that plan and led to an increase in settlement losses.

In determining net pension and other postretirement benefit costs, we amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. For net actuarial gains and losses, we amortize 10 percent of the unamortized balance each year.

We have multiple nonpension postretirement benefit plans for health and life insurance. The health care plans are contributory and subject to various cost sharing features, with participant and company contributions adjusted annually; the life insurance plans are noncontributory. The measurement of the accumulated postretirement benefit obligation assumes a health care cost trend rate of 7.25 percent in 2013 that declines to 5 percent by 2023. A one-percentage-point change in the assumed health care cost trend rate would be immaterial to ConocoPhillips.

Plan Assets—We follow a policy of broadly diversifying pension plan assets across asset classes, investment managers, and individual holdings. As a result, our plan assets have no significant concentrations of credit risk. Asset classes that are considered appropriate include U.S. equities, non-U.S. equities, U.S. fixed income, non-U.S. fixed income, real estate and private equity investments. Plan fiduciaries may consider and add other asset classes to the investment program from time to time. The target allocations for plan assets are 59 percent equity securities, 37 percent debt securities and 4 percent real estate. Generally, the plan investments are publicly traded, therefore minimizing liquidity risk in the portfolio.

The following is a description of the valuation methodologies used for the pension plan assets. There have been no changes in the methodologies used at December 31, 2013 and 2012.

• Fair values of equity securities and government debt securities categorized in Level 1 are primarily based on quoted market prices in active markets for identical assets and liabilities.
• Fair values of corporate debt securities, agency and mortgage-backed securities and government debt securities categorized in Level 2 are estimated using recently executed transactions and quoted market prices for similar assets and liabilities in active markets and for identical assets and liabilities in markets that are not active. If there have been no market transactions in a particular fixed income security, its fair value is calculated by pricing models that benchmark the security against other securities with actual market prices. When observable quoted market prices are not available, fair value is based on pricing models that use something other than actual market prices (e.g., observable inputs such as benchmark yields, reported trades and issuer spreads for similar securities), and these securities are categorized in Level 3 of the fair value hierarchy.
• Fair values of investments in common/collective trusts are determined by the issuer of each fund based on the fair value of the underlying assets.
• Fair values of mutual funds are based on quoted market prices, which represent the net asset value of shares held.
• Cash is valued at cost, which approximates fair value. Fair values of international cash equivalents categorized in Level 2 are valued using observable yield curves, discounting and interest rates. U.S. cash balances held in the form of short-term fund units that are redeemable at the measurement date are categorized as Level 2.
• Fair values of exchange-traded derivatives classified in Level 1 are based on quoted market prices. For other derivatives classified in Level 2, the values are generally calculated from pricing models with market input parameters from third-party sources.
• Private equity funds are valued at net asset value as determined by the issuer based on the fair value of the underlying assets.
• Fair values of insurance contracts are valued at the present value of the future benefit payments owed by the insurance company to the plans' participants.
• Fair values of real estate investments are valued using real estate valuation techniques and other methods that include reference to third-party sources and sales comparables where available.
• A portion of U.S. pension plan assets is held as a participating interest in an insurance annuity contract, which is calculated as the market value of investments held under this contract, less the accumulated benefit obligation covered by the contract. The participating interest is classified as Level 3 in the fair value hierarchy as the fair value is determined via a combination of quoted market prices, recently executed transactions, and an actuarial present value computation for contract obligations. At December 31, 2013, the participating interest in the annuity contract was valued at $110 million and consisted of $312 million in debt securities, less $202 million for the accumulated benefit obligation covered by the contract. At December 31, 2012, the participating interest in the annuity contract was valued at $133 million and consisted of $358 million in debt securities, less $225 million for the accumulated benefit obligation covered by the contract. The net change from 2012 to 2013 is due to a decrease in the fair value of the underlying investments of $46 million and a decrease in the present value of the contract obligation of $23 million. The participating interest is not available for meeting general pension benefit obligations in the near term. No future company contributions are required and no new benefits are being accrued under this insurance annuity contract.

Level 3 activity was not material for all periods.

Our funding policy for U.S. plans is to contribute at least the minimum required by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended. Contributions to foreign plans are dependent upon local laws and tax regulations. In 2014, we expect to contribute approximately $350 million to our domestic qualified and nonqualified pension and postretirement benefit plans and $210 million to our international qualified and nonqualified pension and postretirement benefit plans.

Defined Contribution Plans

Most U.S. employees are eligible to participate in the ConocoPhillips Savings Plan (CPSP). Employees can deposit up to 75 percent of their eligible pay, subject to statutory limits, in the thrift feature of the CPSP to a choice of approximately 37 investment funds. Starting in 2013, employees who participate in the CPSP and contribute 1 percent of their eligible pay receive a 9 percent Company cash match, subject to certain limitations. Prior to 2013, ConocoPhillips matched contribution deposits up to 1.25 percent of eligible pay. Company contributions charged to expense related to continuing and discontinued operations for the CPSP and predecessor plans, excluding the stock savings feature (discussed below), were $101 million in 2013, $16 million in 2012, and $25 million in 2011.

The stock savings feature of the CPSP was a leveraged employee stock ownership plan; however, beginning in 2013, the CPSP no longer has a stock savings feature. Prior to 2013, employees could elect to participate in the stock savings feature by contributing 1 percent of eligible pay and receiving an allocation of shares of common stock proportionate to the amount of contribution.

In 1990, the Long-Term Stock Savings Plan of Phillips Petroleum Company (subsequently the stock savings feature of the CPSP) borrowed funds that were used to purchase previously unissued shares of Company common stock. Since the Company guaranteed the CPSP's borrowings, the unpaid balance was reported as a liability of the Company and unearned compensation was shown as a reduction of common stockholders' equity. Dividends on all shares were charged against retained earnings. The debt was serviced by the CPSP from Company contributions and dividends received on certain shares of common stock held by the plan, including all unallocated shares. The shares held by the stock savings feature of the CPSP were released for allocation to participant accounts based on debt service payments on CPSP borrowings. In 2012, the final debt service payment was made and all remaining unallocated shares were released for allocation to participant accounts. The total number of allocated CPSP stock savings feature shares as of December 31, 2013 and 2012, were 9,280,837 and 11,246,660, respectively.

With the stock savings feature, we recognized interest expense as incurred and compensation expense based on the fair value of the stock contributed or on the cost of the unallocated shares released, using the shares-allocated method. We recognized total CPSP expense related to continuing and discontinued operations for the stock savings feature of $104 million and $77 million in 2012 and 2011, respectively, all of which was compensation expense. In 2012 and 2011, we made cash contributions to the CPSP of $5 million and $4 million, respectively. In 2011, we contributed 660,775 shares of Company common stock from the Compensation and Benefits Trust. The shares had a fair value of $84 million. In 2012 and 2011, we contributed 1,554,355 and 475,696 shares, respectively, of Company common stock from treasury stock. Dividends used to service debt were $10 million and $45 million in 2012 and 2011, respectively. These dividends reduced the amount of compensation expense recognized in each period. Interest incurred on the CPSP debt in 2012 and 2011 was $0.1 million and $1 million, respectively.

We have several defined contribution plans for our international employees, each with its own terms and eligibility depending on location. Total compensation expense related to continuing and discontinued operations recognized for these international plans was approximately $60 million in 2013 and $56 million in both 2012 and 2011.

Share-Based Compensation Plans

The 2011 Omnibus Stock and Performance Incentive Plan of ConocoPhillips (the Plan) was approved by shareholders in May 2011. Over its 10-year life, the Plan allows the issuance of up to 100 million shares of our common stock for compensation to our employees and directors; however, as of the effective date of the Plan, (i) any shares of common stock available for future awards under the prior plans and (ii) any shares of common stock represented by awards granted under the prior plans that are forfeited, expire or are canceled without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company shall be available for awards under the Plan, and no new awards shall be granted under the prior plans. Of the 100 million shares available for issuance under the Plan, no more than 40 million shares of common stock are available for incentive stock options, and no more than 40 million shares are available for awards in stock. The Human Resources and Compensation Committee of our Board of Directors is authorized to determine the types, terms, conditions, and limitations of awards granted. Awards may be granted in the form of, but not limited to, stock options, restricted stock units, and performance share units to employees and nonemployee directors who contribute to the Company's continued success and profitability.

Total share-based compensation expense is measured using the grant date fair value for our equity-classified awards and the settlement date fair value for our liability-classified awards. We recognize share-based compensation expense over the shorter of the service period (i.e., the stated period of time required to earn the award); or the period beginning at the start of the service period and ending when an employee first becomes eligible for retirement, but not less than six months, as this is the minimum period of time required for an award to not be subject to forfeiture. Our share-based compensation programs generally provide accelerated vesting (i.e., a waiver of the remaining period of service required to earn an award) for awards held by employees at the time of their retirement. Some of our share-based awards vest ratably (i.e., portions of the award vest at different times) while some of our awards cliff vest (i.e., all of the award vests at the same time). We recognize expense on a straight-line basis over the service period for the entire award, whether the award was granted with ratable or cliff vesting.

Separation-Related Adjustments—In connection with the separation of the Downstream business on April 30, 2012, ConocoPhillips entered into an Employee Matters Agreement with Phillips 66, which provided that employees of Phillips 66 no longer participate in benefit plans sponsored or maintained by ConocoPhillips. Pursuant to the Employee Matters Agreement, we made certain adjustments, using volumetric weighted-average prices for the 4-day period immediately prior to and immediately following the separation, to the exercise price and number of our share-based compensation awards, with the intention of preserving the intrinsic value of the awards immediately prior to the separation. These adjustments are summarized as follows:

• Outstanding options to purchase common shares of ConocoPhillips stock that were exercisable prior to the separation were adjusted so that the holders of the options would then hold one option to purchase common shares of Phillips 66 stock for every two adjusted stock options to purchase common shares of ConocoPhillips stock following the separation.

• Nonexercisable stock options and restricted stock units were converted to those of the entity where the employee holding them was working immediately post-separation. Therefore, nonexercisable stock options to purchase common shares of ConocoPhillips stock and ConocoPhillips restricted stock units held by an employee who separated with the Downstream business were surrendered as a result of the separation.

   

• In addition, former employee holders and a specified group of holders of stock options and restricted stock units who retired or terminated employment upon or shortly after the separation received both adjusted ConocoPhillips awards and Phillips 66 awards.

   

• ConocoPhillips restricted stock and performance share units awarded for completed performance periods under the Performance Share Program, as well as vested restricted stock units held by current or former directors, were adjusted to provide holders one restricted share or restricted stock unit of Phillips 66 stock for every two restricted shares or restricted stock units of ConocoPhillips stock.

The separation-related adjustments did not have a material impact on either compensation expense for the year ended December 31, 2012, or the number of potentially dilutive securities as of December 31, 2012, to be considered in the calculation of diluted earnings per share of common stock.

Stock Options—Stock options granted under the provisions of the Plan and prior plans permit purchase of our common stock at exercise prices equivalent to the average market price of ConocoPhillips common stock on the date the options were granted. The options have terms of 10 years and generally vest ratably, with one-third of the options awarded vesting and becoming exercisable on each anniversary date following the date of grant. Options awarded to certain employees already eligible for retirement vest within six months of the grant date, but those options do not become exercisable until the end of the normal vesting period.

There were no ranges in the assumptions used to determine the fair market values of our options granted over the past three years.

For 2012 and 2011, expected volatility was based on historical volatility of the Company's stock using ConocoPhillips' end-of-week closing stock prices over a period commensurate with the expected life of the options granted. Due to the separation of our Downstream business in 2012, expected volatility for grants of options in 2013 was based on a three-year average historical stock price volatility of a group of peer companies. We believe our historical volatility for periods prior to the separation of our Downstream business is no longer relevant in estimating expected volatility.

The weighted-average remaining contractual term of vested options and exercisable options at December 31, 2013, was 5.10 years and 4.57 years, respectively. The weighted-average grant date fair value of stock option awards granted during 2012 and 2011 was $15.69 and $16.70, respectively. The aggregate intrinsic value of options exercised during 2012 and 2011 was $469 million and $416 million, respectively.

During 2013, we received $103 million in cash and realized a tax benefit related to both continuing and discontinued operations of $47 million from the exercise of options. At December 31, 2013, the remaining unrecognized compensation expense from unvested options was $17 million, which will be recognized over a weighted-average period of 1.84 years, the longest period being 2.10 years.

Stock Unit Program—Generally, restricted stock units are granted annually under the provisions of the Plan. Restricted stock units granted prior to 2013 vest ratably in three equal annual installments beginning on the third anniversary of the grant date. Beginning in 2013, restricted stock units granted will vest in an aggregate installment on the third anniversary of the grant date. In addition, beginning in 2012, restricted stock units granted under the Plan for a variable long-term incentive program vest ratably in three equal annual installments beginning on the first anniversary of the grant date. Restricted stock units are also granted ad hoc to attract or retain key personnel, and the terms and conditions under which these restricted stock units vest vary by award. Upon vesting, the restricted stock units are settled by issuing one share of ConocoPhillips common stock per unit. Units awarded to retirement eligible employees vest six months from the grant date; however, those units are not issued as common stock until the earlier of separation from the Company or the end of the regularly scheduled vesting period. Until issued as stock, most recipients of the restricted stock units receive a quarterly cash payment of a dividend equivalent that is charged to retained earnings. The grant date fair market value of these restricted stock units is deemed equal to the average ConocoPhillips stock price on the grant date. The grant date fair market value of units that do not receive a dividend equivalent while unvested is deemed equal to the average ConocoPhillips stock price on the grant date, less the net present value of the dividends that will not be received.

At December 31, 2013, the remaining unrecognized compensation cost from the unvested units was $307 million, which will be recognized over a weighted-average period of 2.18 years, the longest period being 6.33 years. The weighted-average grant date fair value of stock unit awards granted during 2012 and 2011 was $60.62 and $67.54, respectively. The total fair value of stock units issued during 2012 and 2011 was $187 million and $109 million, respectively.

Performance Share Program—Under the Plan, we also annually grant restricted performance share units (PSUs) to senior management. These PSUs are authorized three years prior to their effective grant date (the performance period). Compensation expense is initially measured using the average fair market value of ConocoPhillips common stock and is subsequently adjusted, based on changes in the ConocoPhillips stock price through the end of each subsequent reporting period, through the grant date for stock-settled awards and the settlement date for cash-settled awards.

Stock-Settled

For performance periods beginning before 2009, PSUs do not vest until the employee becomes eligible for retirement by reaching age 55 with five years of service, and restrictions do not lapse until the employee separates from the Company. With respect to awards for performance periods beginning in 2009 through 2012, PSUs do not vest until the earlier of the date the employee becomes eligible for retirement by reaching age 55 with five years of service or five years after the grant date of the award, and restrictions do not lapse until the earlier of the employee's separation from the Company or five years after the grant date (although recipients can elect to defer the lapsing of restrictions until separation). We recognize compensation expense for these awards beginning on the grant date and ending on the date the PSUs are scheduled to vest. Since these awards are authorized three years prior to the grant date, for employees eligible for retirement by or shortly after the grant date, we recognize compensation expense over the period beginning on the date of authorization and ending on the date of grant. Until issued as stock, recipients of the PSUs receive a quarterly cash payment of a dividend equivalent that is charged to retained earnings. Beginning in 2013, PSUs authorized for future grants will vest, absent employee election to defer, upon settlement following the conclusion of the three-year performance period. We recognize compensation expense over the period beginning on the date of authorization and ending on the conclusion of the performance period. PSUs are settled by issuing one share of ConocoPhillips common stock per unit.

At December 31, 2013, the remaining unrecognized compensation cost from unvested stock-settled performance share awards was $30 million, which includes $7 million related to unvested stock-settled performance share awards tied to Phillips 66 stock held by ConocoPhillips employees, which will be recognized over a weighted-average period of 3.35 years, the longest period being 7.18 years. The weighted-average grant date fair value of stock-settled performance share units granted during 2012 and 2011 was $74.16 and $70.57, respectively. The total fair value of stock-settled PSUs issued during 2012 and 2011 was $71 million and $37 million, respectively.

Cash-Settled

In connection with and immediately following the separation of our Downstream business in 2012, new performance share units, subject to a shortened performance period, were authorized to be granted. Once granted, these PSUs vest, absent employee election to defer, on the earlier of five years after the grant date of the award or the date the employee becomes eligible for retirement. For employees eligible for retirement by or shortly after the grant date, we recognize compensation expense over the period beginning on the date of authorization and ending on the date of grant. Otherwise, we recognize compensation expense beginning on the grant date and ending on the date the PSUs are scheduled to vest. These PSUs are settled in cash equal to the fair market value of a share of ConocoPhillips common stock per unit on the settlement date and thus are classified as liabilities on the balance sheet. Until settlement occurs, recipients of the PSUs receive a quarterly cash payment of a dividend equivalent that is charged to compensation expense.

Beginning in 2013, PSUs authorized for future grants will vest upon settlement following the conclusion of the three-year performance period. We recognize compensation expense over the period beginning on the date of authorization and ending on the conclusion of the performance period. These PSUs will be settled in cash equal to the fair market value of a share of ConocoPhillips common stock per unit on the settlement date and are classified as liabilities on the balance sheet.

At December 31, 2013, the remaining unrecognized compensation cost from unvested cash-settled performance share awards was $4 million, which will be recognized over a weighted-average period of 3.13 years, the longest period being 4.10 years. There were no cash-settled performance share awards granted, issued or outstanding as of December 31, 2012 or 2011.

From inception of the Performance Share Program through 2013, approved PSU awards were granted after the conclusion of performance periods. Beginning in February 2014, initial target PSU awards will be issued near the beginning of new performance periods. These initial target PSU awards will terminate at the end of the performance periods and will be settled after the performance periods have ended. Also in 2014, initial target PSU awards will be issued for open performance periods that began in prior years. For the open performance period beginning in 2012, the initial target PSU awards will terminate at the end of the three-year performance period and will be replaced with approved PSU awards. For the open performance period beginning in 2013, the initial target PSU awards will terminate at the end of the three-year performance period and will be settled after the performance period has ended.

Other—In addition to the above active programs, we have outstanding shares of restricted stock and restricted stock units that were either issued to replace awards held by employees of companies we acquired or issued as part of a compensation program that has been discontinued. Generally, the recipients of the restricted shares or units receive a quarterly dividend or dividend equivalent.

At December 31, 2013, all outstanding restricted stock and restricted stock units were fully vested and there was no remaining compensation cost to be recorded. The weighted-average grant date fair value of awards granted during 2012 and 2011 was $63.54 and $70.25, respectively. The total fair value of awards issued during 2012 and 2011 was $73 million and $10 million, respectively.

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