The 35-year-old defenceman will make US$2.5 million in each of the next two seasons.
"I think we have good things that are going to happen here and I want to be a part of that," Phillips told the Senators' official website from Calgary. "I was very happy and relieved at the same time to get something done."
He was believed to be pushing for a two-year deal, while the team was originally offering one. Phillips told the team website that he didn't think this would be his last NHL contract.
"I want to keep contributing and play the game," Phillips said. "It's not something that I've got two years and now I can sit back. I want to keep pushing forward. At the end of this deal, maybe we'll go through all this again."
Phillips, who was the first overall pick of the Senators in 1996, has a goal and 12 assists in 52 games this season.
Ottawa lost winger Cory Conacher off waivers when he was claimed by the Buffalo Sabres. The Senators had acquired Conacher from the Tampa Bay Lightning at last year's deadline in exchange for goaltender Ben Bishop, who will likely be a Vezina Trophy candidate this season.
In another move signalling general manager Bryan Murray's hopes of making the playoffs this year, Ottawa acquired 30-year-old winger Ales Hemsky from the Edmonton Oilers for a third- and a fifth-round pick.
Phillips, who serves as one of the Senators' alternate captains, saw that as a positive message to the locker-room.
"It feels great that (management believes) because the guys in the room still do, and when you have the support of them as well, it brings a little bit of extra life that's maybe needed right now for that push," Phillips said. "That's our goal right now."