SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ------------------
Commission file number 1-720
----------------------------------------------------
PHILLIPS PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-0400345
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Phillips Building, Bartlesville, Oklahoma 74004
(Address of principal executive offices) (Zip Code)
918-661-6600
(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 X No
----- -----
The registrant has 261,563,137 shares of common stock, $1.25 par value,
outstanding at July 31, 1994.
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
---------------------------------
Three Months Six Months
Ended Ended
June 30 June 30
---------------------------------
1994 1993 1994 1993
---------------------------------
Revenues
Sales and other operating revenues $2,995 3,230 5,879 6,259
Business interruption insurance - 14 - 14
Equity in earnings of affiliated
companies 22 17 39 38
Other revenues 11 19 34 52
- ---------------------------------------------------------------------
Total Revenues 3,028 3,280 5,952 6,363
- ---------------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 1,843 1,973 3,522 3,796
Production and operating expenses 516 538 1,039 1,075
Exploration expenses 54 38 99 76
Selling, general and
administrative expenses 116 152 226 317
Depreciation, depletion,
amortization and retirements 201 200 405 394
Taxes other than income taxes 60 76 131 147
Interest and expense on
indebtedness 69 71 145 135
Preferred dividend requirements
of subsidiary 8 8 16 16
- ---------------------------------------------------------------------
Total Costs and Expenses 2,867 3,056 5,583 5,956
- ---------------------------------------------------------------------
Income before income taxes,
subsidiary stock transaction
and extraordinary item 161 224 369 407
Gain on subsidiary stock
transaction - - 20 -
- ---------------------------------------------------------------------
Income before Income Taxes
and Extraordinary Item 161 224 389 407
Provision for income taxes 85 101 186 223
- ---------------------------------------------------------------------
Income before extraordinary item 76 123 203 184
Extraordinary item - (2) - (2)
- ---------------------------------------------------------------------
Net Income $ 76 121 203 182
=====================================================================
Per Share of Common Stock
Income before extraordinary item $ .29 .47 .78 .71
Extraordinary item - (.01) - (.01)
- ---------------------------------------------------------------------
Net Income $ .29 .46 .78 .70
=====================================================================
Dividends paid $ .28 .28 .56 .56
Average Common Shares Outstanding
(in thousands) 261,527 260,936 261,477 260,647
- ---------------------------------------------------------------------
See Notes to Financial Statements.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-------------------------
June 30 December 31
1994 1993*
-------------------------
Assets
Cash and cash equivalents $ 128 119
Accounts and notes receivable (less
allowances: 1994--$14; 1993--$14) 1,421 1,248
Inventories 532 538
Deferred income taxes 165 170
Prepaid expenses and other current
assets 96 118
- -----------------------------------------------------------------
Total Current Assets 2,342 2,193
Investments and long-term receivables 596 543
Properties, plants and equipment (net) 7,997 7,961
Deferred income taxes 92 98
Deferred charges 80 73
- -----------------------------------------------------------------
Total $11,107 10,868
=================================================================
Liabilities
Accounts payable $ 1,199 1,199
Long-term debt due within one year 26 18
Accrued income and other taxes 842 858
Other accruals 176 196
- -----------------------------------------------------------------
Total Current Liabilities 2,243 2,271
Long-term debt 3,387 3,208
Accrued dismantlement, removal and
environmental costs 547 528
Deferred income taxes 950 901
Other liabilities and deferred credits 842 910
- -----------------------------------------------------------------
Total Liabilities 7,969 7,818
- -----------------------------------------------------------------
Preferred Stock of Subsidiary and Other
Minority Interests 351 362
- -----------------------------------------------------------------
Stockholders' Equity
Common stock--500,000,000 shares
authorized at $1.25 par value
Issued (277,180,511 shares)
Par value 346 346
Capital in excess of par 986 977
Treasury stock (at cost: 1994--
15,617,374 shares; 1993--
15,700,279 shares) (871) (885)
Foreign currency translation adjustments 9 (14)
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (473) (487)
Retained earnings 2,790 2,751
- -----------------------------------------------------------------
Total Stockholders' Equity 2,787 2,688
- -----------------------------------------------------------------
Total $11,107 10,868
=================================================================
See Notes to Financial Statements.
*Certain amounts have been reclassified to conform to current
presentation.
2
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Six Months Ended
June 30
-------------------
1994 1993
-------------------
Cash Flows from Operating Activities
Net income $ 203 182
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion, amortization
and retirements 405 394
Dry hole costs and leasehold impairment 46 22
Deferred taxes 13 4
Extraordinary items - 2
Increase in accounts and notes
receivable (176) (83)
Decrease (increase) in inventories (7) 5
Decrease in prepaid expenses and
other current assets 24 17
Decrease in accounts payable (2) (3)
Decrease in taxes and other accruals (41) (20)
Other (49) 44
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 416 564
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures, including dry
hole costs (489) (517)
Property dispositions 12 238
Investment purchases (16) (2)
Investment sales 73 55
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (420) (226)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 1,038 1,466
Repayment of debt (854) (1,648)
Issuance of company stock 4 12
Purchase of company stock (1) (2)
Dividends paid (146) (146)
Other (28) (14)
- -----------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities 13 (332)
- -----------------------------------------------------------------
Increase in Cash and Cash Equivalents 9 6
Cash and cash equivalents at beginning of
period 119 131
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 128 137
=================================================================
See Notes to Financial Statements.
3
<PAGE>
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Petroleum Company
Note 1--Interim Financial Information
The financial information for the interim periods presented in
the financial statements included in this report is unaudited and
includes all known accruals and adjustments which Phillips
Petroleum Company (hereinafter referred to as "Phillips" or "the
company") considers necessary for a fair statement of the results
for such periods. All such adjustments are of a normal and
recurring nature.
Note 2--Extraordinary Item
In the second quarter of 1993, the company incurred a before-tax
extraordinary loss of $3 million attributed to call premiums paid
on the early redemption of debt. The after-tax loss was
$2 million, $.01 per share.
Note 3--Inventories
Inventories consisted of the following:
Millions of Dollars
-----------------------
June 30 December 31
1994 1993
-----------------------
Crude oil and petroleum products $212 183
Chemical products 228 252
Materials, supplies and other 92 103
- -----------------------------------------------------------------
$532 538
=================================================================
Note 4--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Millions of Dollars
-----------------------
June 30 December 31
1994 1993
-----------------------
Properties, plants and equipment
(at cost) $18,267 18,038
Less accumulated depreciation,
depletion and amortization 10,270 10,077
- -----------------------------------------------------------------
$ 7,997 7,961
=================================================================
4
<PAGE>
Note 5--Gain on Subsidiary Stock Transaction
In the first quarter of 1994, Phillips Petroleum Singapore
Chemicals (Private) Limited (PPSC), a subsidiary that owns and
operates a polyethylene plant in Singapore, completed the sale of
117,857,144 shares of common stock for $85 million in notes
receivable, which will be collected as needed for plant
construction planned for 1994 and 1995. This sale reduced the
company's interest in PPSC from 85.7 percent to 50 percent, and
resulted in a $20 million gain. As a result of this transaction,
PPSC is now accounted for using the equity method. Deferred
taxes have not been provided on the gain because the temporary
difference between the financial and tax bases is not expected to
reverse in the foreseeable future. The deconsolidation of PPSC
did not have a material effect upon the company's financial
position.
Note 6--Debt
Effective April 15, 1994, the company refinanced four of its bank
credit facilities, totaling $1.4 billion, with one facility of
$800 million, reducing the amount of its available bank credit by
$600 million. The terms of the one new facility are similar to
the terms of the credit facilities terminated. At June 30, 1994,
the company had committed credit facilities with major banks of
$1.1 billion. Of this, $720 million was available to be drawn.
In addition, the company has a $250 million committed letter-of-
credit-supported commercial paper program under which
$103 million had been issued at June 30, 1994.
Also during April, the company's Long-Term Stock Savings Plan
(LTSSP) signed a $131 million term loan agreement that was used
to refinance its outstanding notes payable issued in 1988. The
notes were redeemed on May 16. The new term loan requires
repayment in annual installments through the year 1998, the same
maturity as the refinanced loan. The first installment was made
on June 15, reducing the outstanding balance to $114 million at
June 30, 1994. The company continues to guarantee the payment of
the LTSSP debt.
Note 7--Income Taxes
The company's effective tax rates for the three-month periods
ended June 30, 1994 and 1993, were 53 percent and 45 percent,
respectively. The company's effective tax rates for the six-
month periods ended June 30, 1994 and 1993, were 48 percent and
55 percent, respectively. Year-to-year fluctuations in the
effective tax rates result primarily from the change in the
proportion of foreign income to domestic income. Foreign income
is taxed at relatively higher rates than domestic income.
5
<PAGE>
Note 8--Stock Options
The company has options outstanding under the Omnibus Securities
Plan of Phillips Petroleum Company and the Stock Option Plans of
the 1986 and 1990 Stock Plans. The 1986 and 1990 Stock Plans,
each of which included a Stock Option Plan and a Strategic
Incentive Plan, allowed the granting of stock options and stock
awards during the five-year periods beginning January 1, 1986,
through December 31, 1990, and January 1, 1990, through
December 31, 1994, respectively. Approval of the Omnibus
Securities Plan had the effect of terminating further awards and
option grants under the 1986 and 1990 Stock Plans. Options
issued to date under these plans permit the purchase of stock at
exercise prices equivalent to the average market price of the
company's common stock on the date the options were granted. The
options have terms of 10 years and normally become exercisable in
increments up to 25 percent on each of the first four anniversary
dates following the date of grant. Stock Appreciation Rights
(SARs) may from time to time be affixed to the options.
A comparative summary of stock options and SARs follows:
1994 1993
--------- ---------
Shares under option January 1 5,614,501 5,170,280
Options granted at
$25.07 to $30.32 per share 1,414,436 1,608,245
Options exercised at
$12.63 to $25.38 per share (30,187) (274,359)
Options forfeited (5,134) -
- ----------------------------------------------------------------
Shares under option March 31 6,993,616 6,504,166
Options granted at
$28.44 to $30.00 per share 29,010 48,945
Options exercised at
$12.63 to $27.50 per share (201,644) (543,007)
Options forfeited (104,369) (6,140)
- ----------------------------------------------------------------
Shares under option
June 30 (at exercise prices
from $12.63 to $35.00 per share) 6,716,613 6,003,964
================================================================
Options exercisable
June 30 (at exercise prices
from $12.63 to $30.00 per share) 3,747,828 3,279,842
- ----------------------------------------------------------------
SARs under option January 1 196,616 332,588
SARs forfeited - (15,656)
- ----------------------------------------------------------------
SARs under option March 31 196,616 316,932
SARs forfeited (64,482) (85,624)
- ----------------------------------------------------------------
SARs under option, all exercisable
June 30 (at exercise prices
from $12.63 to $16.25 per share) 132,134 231,308
================================================================
6
<PAGE>
Note 9--Contingent Liabilities
Environmental
The company is subject to federal, state and local environmental
laws and regulations. These may result in possible 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. The company
is currently participating in environmental assessments and
cleanup under these laws at federal Superfund and comparable
state sites. For sites where it is probable that future costs
will be incurred and such costs can be reasonably estimated,
accruals have been recorded. In addition, the company has
accrued for planned remediation activities and for environmental
proceedings not related to Superfund sites. In the future, the
company may be involved in additional environmental assessments,
cleanups and proceedings. The amount of such future costs is
indeterminable due to factors such as the unknown magnitude of
cleanup costs, the unknown time and extent of any remedial
actions that may be required, and the determination of the
company's liability in proportion to other responsible parties.
HCC Litigation
The company continues to defend claims resulting from the
October 23, 1989, explosion and fire at Phillips 66 Company's
Houston Chemical Complex (HCC). All suits involving fatalities
and most of those involving serious physical injury have been
settled. Most of the approximately 75 remaining claimants seek
compensatory and punitive damages, primarily for psychological
injury.
The company believes that should the ultimate cost of the
disposition of such claims, whether by settlement or after trial,
exceed amounts for which the company has made provision, such
excess would not have a material adverse impact on its financial
position.
Other Legal Proceedings
The company is a party to a number of other legal proceedings,
including tax proceedings, pending in various courts or agencies
for which, in some instances, no provision has been made. Costs
related to contingencies are provided when a loss is probable and
the amount is reasonably estimable.
7
<PAGE>
Other Contingencies
The company has contingent liabilities resulting from throughput
agreements with pipeline and processing companies in which it
holds stock interests. Under these agreements, Phillips may be
required to provide any such company with additional funds
through advances against future charges for the shipping or
processing of petroleum liquids, natural gas and refined
products.
While it is not possible at this time to establish the ultimate
amount of liability with respect to contingent liabilities,
including those related to environmental matters and legal
proceedings, the company is of the opinion that any such
liabilities for which provision has not been made, will not have
a material adverse effect on its financial position.
Note 10--Cash Flow Information
Cash payments and noncash investing and financing activities for
the six-month periods ended June 30 were as follows:
Millions of Dollars
-------------------
1994 1993
-------------------
Cash payments
Interest
Debt $118 109
Taxes and other 27 41
- -----------------------------------------------------------------
$145 150
=================================================================
Income taxes $241 294
- -----------------------------------------------------------------
Noncash investing and financing activities
Accrued expenditures for two liquefied
natural gas tankers based on percentage
of completion $ - 13
- -----------------------------------------------------------------
Treasury stock awards issued (canceled)
under incentive compensation plans (3) 6
- -----------------------------------------------------------------
Capitalized process license fee due in
installments from 1993 to 1999 - 16
- -----------------------------------------------------------------
8
<PAGE>
- -----------------------------------------------------------------
Management's Discussion And Analysis Phillips Petroleum Company
RESULTS OF OPERATIONS
A summary of the company's consolidated net income by business
segment:
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993* 1994 1993*
------------------ ----------------
Exploration and Production
(E&P)
United States $ 61 102 127 181
Foreign 15 26 34 77
- -----------------------------------------------------------------
76 128 161 258
Gas Gathering, Processing
and Marketing (GPM) (2) 12 2 29
Refining, Marketing and
Transportation (RM&T) 31 53 68 61
Chemicals 45 14 119 19
Corporate and Other (74) (84) (147) (183)
- -----------------------------------------------------------------
Income before
Extraordinary Item 76 123 203 184
Extraordinary Item - (2) - (2)
- -----------------------------------------------------------------
Net Income $ 76 121 203 182
=================================================================
*Amounts for 1993 have been restated to reflect that certain
operations previously a part of RM&T are now included in
Chemicals.
Consolidated Results
Consolidated net income for the three-month period ended June 30,
1994, was $76 million, compared with $121 million for the same
period in 1993. For the six-month period ended June 30, 1994,
consolidated net income was $203 million, up from $182 million in
the same period a year ago.
9
<PAGE>
Earnings included the following special items on an after-tax
basis:
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Net gains on asset sales $ - 2 - 22
Gain on subsidiary stock
transaction - - 20 -
Capital-loss carryforwards - 2 - 2
Work force reduction charges - (4) (5) (26)
Foreign currency gains
(losses) 1 (3) 1 (4)
Pending claims 14 (13) 17 (13)
Other items 1 2 1 9
- -----------------------------------------------------------------
Total special items 16 (14) 34 (10)
Extraordinary item
Early retirement of debt - (2) - (2)
- -----------------------------------------------------------------
Total $16 (16) 34 (12)
=================================================================
Excluding the above items, operating income was $60 million for
the second quarter of 1994, compared with $137 million in the
second quarter of 1993. For the six-month period ending June 30,
operating income was $169 million in 1994, compared with
$194 million in 1993.
Although crude oil sales prices rose during the second quarter of
1994, the average worldwide price remained over $2 per barrel
lower than that received in the second quarter last year, leading
to lower E&P operating income in the second quarter. Natural gas
liquids (NGL) prices increased only slightly during the second
quarter, and the average price remained over $2 per barrel lower
than the price received in the second quarter of 1993. This,
coupled with lower residue gas sales prices, resulted in lower
operating income from GPM.
Although the company's refineries were running at capacity, RM&T
operating income was down for the second quarter, due mainly to
lower margins for gasoline and distillates. In Chemicals,
operating income for the second quarter was up from last year's
second quarter, due to improved margins for olefins and aromatics
and higher U.S. plastics sales volumes.
For the six-month period ended June 30, 1994, E&P and GPM results
were lower than the first six months of 1993, primarily for the
same reasons as in the second quarter--lower crude oil and NGL
sales prices. In RM&T, low crude oil feedstock costs in the
first quarter of 1994 more than offset lower petroleum products
sales prices which resulted in improved six-months earnings. In
Chemicals, higher olefins and U.S. plastics sales volumes and
improved margins for olefins and aromatics contributed to
10
<PAGE>
significantly higher six-month earnings compared with the same
period a year ago. Also contributing to the increase was the
sale of a polypropylene license.
Phillips at a Glance
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Crude oil production (MBD)
United States 92 92 92 95
Foreign 114 106 114 106
- -----------------------------------------------------------------
206 198 206 201
=================================================================
Natural gas production
(MMCFD)
United States 1,004 984 1,040 1,004
Foreign 352 367 380 412
- -----------------------------------------------------------------
1,356 1,351 1,420 1,416
=================================================================
Natural gas liquids
production - worldwide
(MBD) 158 156 159 156
Liquefied natural gas
sales (MMCFD) 98 91 106 102
Refinery utilization
rate (%) 109 102 101 100
Automotive gasoline
sales - U.S. (MBD) 310 314 296 305
Distillate sales -
U.S. (MBD) 130 97 126 97
Liquefied petroleum gas
sales - U.S. (MBD) 93 89 107 106
Ethylene sales (MMlbs)* 280 285 578 540
Polyethylene sales - U.S.
(MMlbs) 325 281 658 528
Propylene sales (MMlbs) 89 114 209 248
Polypropylene sales (MMlbs) 119 62 226 132
*Includes amounts equal to Phillips' 50 percent interest in the
Sweeny Olefins Limited Partnership (SOLP), after exclusion of
any amounts sold by SOLP to Phillips.
Segment Results
E&P Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Reported net income $ 76 128 161 258
Less special items 6 (1) 10 20
- -----------------------------------------------------------------
Operating income $ 70 129 151 238
=================================================================
11
<PAGE>
Although crude oil prices trended upward in the second quarter of
1994, average prices for the quarter continued to be lower than
those received a year ago, resulting in lower operating income in
both the second quarter and the first six months of 1994. Also
contributing to the lower operating income in both periods of
1994 were higher exploration expenses, primarily due to higher
dry hole charges in the United States.
Sales prices, exploration expenses and operating statistics for
worldwide E&P:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Sales Prices
Crude oil (per barrel)
United States $13.83 15.58 12.43 15.49
Foreign 15.85 18.52 14.79 18.47
Worldwide 14.96 17.14 13.79 17.11
Natural gas--lease (per
thousand cubic feet)
United States 1.85 2.06 1.93 1.95
Foreign 2.26 2.33 2.28 2.38
Worldwide 1.97 2.14 2.04 2.09
Millions of Dollars
-------------------------------------
Worldwide Exploration
Expenses
Geological and geophysical $ 26 27 50 50
Leasehold impairment 7 5 12 11
Dry holes 19 4 34 11
Lease rentals 2 2 3 4
- -----------------------------------------------------------------
$ 54 38 99 76
=================================================================
Thousands of Barrels Daily
-------------------------------------
Operating Statistics
Crude Oil Produced
United States 92 92 92 95
Norway 81 68 81 67
United Kingdom 5 7 5 6
Africa 23 24 24 25
Other areas 5 7 4 8
- -----------------------------------------------------------------
206 198 206 201
=================================================================
Natural Gas Liquids Produced
United States 1 6 1 6
Norway 7 7 8 7
Other areas 1 1 1 1
- -----------------------------------------------------------------
9 14 10 14
=================================================================
12
<PAGE>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Millions of Cubic Feet Daily
-------------------------------------
Natural Gas Produced
United States (less gas
equivalent of liquids
shown above) 1,004 984 1,040 1,004
Norway* 255 276 259 293
United Kingdom* 50 41 72 59
Other areas 47 50 49 60
- -----------------------------------------------------------------
1,356 1,351 1,420 1,416
=================================================================
*Dry basis.
Liquefied Natural Gas
Sales 98 91 106 102
- -----------------------------------------------------------------
U.S. E&P Millions of Dollars
- -------- -------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Reported net income $ 61 102 127 181
Less special items 5 3 9 4
- -----------------------------------------------------------------
Operating income $ 56 99 118 177
=================================================================
The decrease in operating income for the second quarter of 1994,
compared with the second quarter of 1993, was due primarily to
lower crude oil sales prices and higher exploration expenses.
Average U.S. crude oil sales prices were $13.83 for the second
quarter of 1994, down 11 percent from the second quarter of 1993.
Dry hole charges for exploration in the Gulf of Mexico were
primarily responsible for the increased exploration expenses in
the second quarter of this year, compared with last year's second
quarter.
Operating income also decreased for the six-month period ended
June 30, 1994, compared with the same period in 1993. Lower
crude oil sales prices--20 percent lower than the average sales
prices for the first six months of 1993--and higher dry hole
charges were also the primary factors contributing to the
decline.
U.S. crude oil and natural gas production changed only slightly
from last year's levels.
Special items in the second quarter of 1994 consisted primarily
of favorable settlements related to the company's Alaska
operations. In addition, the six-month period ended June 30,
1994, also included a favorable settlement related to a net
profits interest, partially offset by a contingency accrual.
13
<PAGE>
Special items in the second quarter of 1993 consisted of a
favorable property tax settlement related to the company's
minerals operations.
Foreign E&P Millions of Dollars
- ----------- -------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Reported net income $15 26 34 77
Less special items 1 (4) 1 16
- -----------------------------------------------------------------
Operating income $14 30 33 61
=================================================================
Operating income decreased in the second quarter of 1994,
compared with the same period a year ago, primarily due to
14 percent lower crude oil sales prices and higher depreciation,
depletion and amortization charges due to an increase in
estimated dismantlement costs for the Maureen field in the U.K.
North Sea.
Operating income also decreased in the first six months of 1994,
compared with the first six months of 1993, due to 20 percent
lower crude oil sales prices, the higher Maureen field
dismantlement charges and higher depreciation, depletion and
amortization in Norway due to increased crude oil production
levels.
When compared with the same 1993 periods, foreign crude oil
production was up 8 percent both in the second quarter of 1994
and the first six months, due primarily to increased production
from the Embla field in Norway, which started production in the
spring of 1993. The increase was partly offset by loss of
production due to asset sales in Egypt and Australia.
Foreign natural gas production was lower than a year ago for both
the second quarter and first six months. In Norway, increased
reinjection of produced gas as part of the company's subsidence
mitigation strategy, coupled with lower buyer demand, resulted in
lower gas production. In addition, the loss of production due to
asset sales contributed to the overall foreign gas production
decline.
Special items for both the second quarter and six-month period in
1994 consisted of foreign currency gains. Special items for the
second quarter of 1993 were primarily foreign currency losses.
Special items for the six-month period in 1993 consisted of
after-tax asset sale gains of $20 million, partly offset by
foreign currency losses.
14
<PAGE>
GPM Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Reported net income $(2) 12 2 29
Less preferred dividend
requirements of Phillips
Gas Company (8) (8) (16) (16)
- -----------------------------------------------------------------
Operating income $ 6 20 18 45
=================================================================
The company's GPM operations are conducted primarily through GPM
Gas Corporation, a wholly owned subsidiary of Phillips Gas
Company. The effect of Phillips Gas Company's preferred dividend
requirements has been excluded in determining operating income.
Sales prices and operating statistics for GPM:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Sales Prices
U.S. residue gas (per
thousand cubic feet) $ 1.83 2.13 1.97 2.00
U.S. natural gas liquids
(per barrel--
unfractionated) 9.37 11.57 9.17 11.82
Millions of Cubic Feet Daily
-------------------------------------
Operating Statistics
Natural Gas Purchases
Outside Phillips 1,148 1,047 1,139 1,030
Phillips 203 197 206 203
- -----------------------------------------------------------------
1,351 1,244 1,345 1,233
=================================================================
Raw Gas Throughput 1,493 1,391 1,493 1,386
- -----------------------------------------------------------------
Residue Gas Sales
Outside Phillips 854 757 857 748
Phillips 88 89 86 91
- -----------------------------------------------------------------
942 846 943 839
=================================================================
Thousands of Barrels Daily
-------------------------------------
Natural Gas Liquids
Production
From leasehold gas 21 21 22 22
From purchased gas 128 121 127 120
- -----------------------------------------------------------------
149 142 149 142
=================================================================
15
<PAGE>
GPM's operating income in the second quarter of 1994 continued to
reflect the impact of low NGL sales prices. Though NGL price
movement generally tracks the movement in crude oil prices,
average NGL prices for the second quarter of 1994 increased only
4 percent from the first quarter of 1994, compared with a
26 percent increase in U.S. crude, and remained over $2 per
barrel lower than the second quarter a year ago. In addition,
residue gas sales prices began a seasonal summer decline, a
normal annual event, which did not occur in 1993. As a result,
GPM's operating income was down 70 percent in the second quarter
of 1994, compared with the 1993 second quarter.
For the first six months of 1994, operating income was down, when
compared with the first six months of 1993. The decline was
primarily caused by low NGL sales prices and higher operating
costs, partially offset by lower raw gas purchase prices and
higher raw gas throughput volumes. Operating costs increased due
to gathering fees the company began paying GPM Gas Gathering
L.L.C. (GGG), effective January 1, 1994, along with costs
associated with acquisitions and expansions of existing
facilities. This expansion strategy contributed to an 8 percent
increase in raw gas throughput volumes for the six-month period.
RM&T Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Reported net income $ 31 53 68 61
Less special item - 8 - 5
- -----------------------------------------------------------------
Operating income $ 31 45 68 56
=================================================================
Sales prices and operating statistics for RM&T:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Sales Prices (per gallon)
Automotive gasoline $.57 .65 .54 .62
Distillates .50 .57 .50 .57
Propane .35 .37 .35 .41
Operating Statistics
Refinery crude oil
capacity utilization 109% 102 101 100
16
<PAGE>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Thousands of Barrels Daily
-------------------------------------
Operating Statistics
Refinery Operations
Crude Oil Refined 331 312 309 304
- -----------------------------------------------------------------
Petroleum Products Outside
Sales*
United States
Automotive gasoline 288 288 273 279
Aviation fuels 32 34 32 32
Distillates 130 97 126 97
Propane 9 12 24 26
Other products 20 18 18 17
- -----------------------------------------------------------------
479 449 473 451
Foreign 52 52 57 53
- -----------------------------------------------------------------
531 501 530 504
=================================================================
*Amounts for 1993 have been restated to reflect that certain
operations previously a part of RM&T are now included in
Chemicals.
Second quarter 1994 operating income for the RM&T segment was
$31 million, a $14 million decline from 1993's second quarter
operating income of $45 million. Lower gasoline and distillate
margins were primarily responsible for the decrease in operating
income, as the beginning of the summer driving season only
provided modest price increases for automotive gasoline, while
crude oil feedstock costs increased at a higher rate during the
quarter. Offsetting the negative effect of lower margins was an
excellent operating performance by the company's refineries,
which ran at 109 percent of rated crude oil capacity for the
quarter, resulting in increased overall petroleum product sales
volumes.
Operating income was up 21 percent for the first six months of
1994, compared with the same period last year. Lower crude oil
prices, compared with a year ago, resulted in 15 percent lower
feedstock costs for the company's refineries. However, this was
partially offset by lower gasoline and distillate sales prices.
The special item for the second quarter of 1993 was an $8 million
after-tax business interruption insurance settlement. For the
first six months of 1993, in addition to the insurance
settlement, there was an after-tax contingency accrual of
$3 million.
17
<PAGE>
Chemicals Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Reported net income $45 14 119 19
Less special items 6 (10) 27 (10)
- -----------------------------------------------------------------
Operating income $39 24 92 29
=================================================================
Operating statistics for Chemicals:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Millions of Pounds
-------------------------------------
Operating Statistics
Selected Outside Sales
Ethylene* 280 285 578 540
Polyethylene - U.S. 325 281 658 528
Propylene 89 114 209 248
Polypropylene 119 62 226 132
Thousands of Barrels Daily
-------------------------------------
Other Selected Product
Outside Sales
Automotive gasoline
(Puerto Rico Core
by-product) 22 26 23 26
Liquefied petroleum gas 84 77 83 80
Ethanes and pentanes 36 43 40 48
*Includes amounts equal to Phillips' 50 percent interest in the
Sweeny Olefins Limited Partnership (SOLP), after exclusion of
any amounts sold by SOLP to Phillips.
Results for the second quarter of 1994 were improved over last
year for the company's Chemicals segment. Strong demand for
olefins allowed for price increases which led to better margins
and improved operating income. Ethylene inventories are at low
levels industry-wide, and demand remains high. Industry supply
disruptions created a tight supply situation for aromatics in the
second quarter. As a result, margins improved at the company's
Puerto Rico Core facility. Work to expand Core's paraxylene
capacity and implement the Aromax catalytic reforming technology
continue. In the company's plastics operations, sales volumes of
U.S. polyethylene and polypropylene continued to be higher than a
year ago. During second quarter 1994, ethylene feedstock
supplies tightened, increasing feedstock prices and pressuring
margins. However, demand for polyethylene and polypropylene
continues to strengthen.
18
<PAGE>
Operating income was up sharply for the first six months of 1994,
compared with the same period in 1993. Earnings improved due to
higher margins for olefins and aromatics and higher olefin and
U.S. plastics sales volumes. In addition, operating income
benefitted $18 million from the sale of a polypropylene license.
Special items for the second quarter of 1994 included a favorable
adjustment to a 1993 accrual for the abandonment of a pipeline
and a favorable settlement related to the company's aromatics
operations. In addition to the above items, the first six months
of 1994 included an after-tax gain of $20 million from a
subsidiary stock transaction. Special items for the second
quarter and first six months of 1993 represented an accrual for
the abandonment of the pipeline.
Corporate and Other Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
Reported Corporate and
Other $(74) (84) (147) (183)
Less special items 4 (11) (3) (25)
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(78) (73) (144) (158)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(36) (34) (61) (77)
Net interest (45) (46) (94) (91)
Other 3 7 11 10
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(78) (73) (144) (158)
=================================================================
Corporate general and administrative expenses for the second
quarter of 1994 changed only slightly from the same quarter in
1993. For the first six months of 1994, Corporate general and
administrative expenses were down $16 million relative to the
same period last year. The decline in expenses was primarily due
to lower costs retained at Corporate associated with the
company's incentive compensation plans, along with increased
direct charges to the operating segments.
Net interest represents interest income and expense, net of
capitalized interest. Net interest for the second quarter of
1994 changed only slightly from last year's second quarter. For
the six-month period, net interest was up 3 percent, primarily
due to higher interest on debt.
19
<PAGE>
Other consists primarily of the company's insurance operations,
along with income tax and other items that are not directly
associated with the operating segments on a stand-alone basis.
Relative to the second quarter of 1993, Other earnings were down
in the second quarter of 1994, primarily due to contingency
accruals and environmental costs. For the six-month period,
Other earnings were up slightly relative to last year.
Special items in the second quarter of 1994 included the interest
applicable to favorable resolutions of various legal issues. In
addition, the six-month period included an asset sale, a work
force reduction charge and a contingency accrual. For the second
quarter of 1993, special items consisted primarily of an after-
tax accrual for pending claims of $13 million. The first six
months of 1993 included, in addition to the above item, an after-
tax work force reduction charge of $26 million, partly offset by
tax related settlements and contingencies.
Income Statement Analysis
Revenues
Total revenues for the second quarter of 1994 were $3.0 billion,
compared with $3.3 billion for the second quarter of 1993, and
$6.0 billion versus $6.4 billion for the comparable six-month
periods. Sales and other operating revenues were down 7 percent
and 6 percent, respectively, due to lower crude oil, NGL,
leasehold and residue gas, and petroleum products sales prices,
partly offset by higher sales volumes for most key products.
Total Costs and Expenses
Total costs and expenses for the second quarter and first six
months of 1994 were down 6 percent, when compared with the same
periods in 1993. Purchase costs decreased primarily due to lower
crude oil and NGL feedstock costs. Production and operating
costs declined due primarily to the effect of asset sales and the
company's cost reduction efforts. Exploration expenses were
higher due primarily to dry hole charges related to the company's
exploratory efforts in the Gulf of Mexico. Selling, general and
administrative expenses were down due to asset sales, lower work
force reduction charges and a contingency accrual recorded in the
second quarter of 1993. Depreciation, depletion, amortization
and retirements (DD&A) changed only slightly for the second
quarter, as the higher Norway and United Kingdom DD&A charges
were offset by the 1993 accrual for the abandonment of a
pipeline. For the six months, DD&A was up 3 percent due to
higher DD&A from Norway and United Kingdom operations, partially
offset by the pipeline abandonment accrual and asset sales in
1993. Taxes other than income taxes declined due to a favorable
settlement related to production taxes, coupled with general
production tax decreases due to lower production and sales prices
20
<PAGE>
associated with the company's interest in the Prudhoe Bay field.
Interest expense was down slightly for the quarter, and up
7 percent for the six-month period, due primarily to higher
interest on debt and reversals of contingency related interest
accruals in the 1993 period.
Income Taxes
The company's effective tax rate for the second quarter of 1994
was 53 percent, compared with 45 percent for the second quarter
of 1993. The company's effective tax rate for the six months
ended June 30, 1994 was 48 percent, compared with 55 percent for
the same period in 1993. Year-to-year fluctuations in the
effective tax rates result primarily from the changes in the
proportion of foreign income to domestic income. Foreign income
is taxed at relatively higher rates than domestic income.
Effective tax rates for the three- and six-month periods ended
June 30, 1994 and 1993, benefitted from domestic tax credits for
producing fuel from nonconventional sources. Without these tax
credits, the effective tax rates for the three-month periods
ended June 30, 1994 and 1993, would have been 60 percent and
50 percent, respectively, and the rates for the six-month periods
would have been 54 percent and 60 percent, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-----------------------------
At At At
June 30 December 31 June 30
1994 1993 1993
-----------------------------
Current ratio 1.0 1.0 1.0
Long-term debt $3,387 3,208 3,605
Preferred stock of subsidiary $ 345 345 345
Stockholders' equity $2,787 2,688 2,762
Percent of long-term debt
to capital* 52% 51 54
Percent of floating-rate debt
to total debt 29% 25 40
*Capital includes long-term debt, preferred stock of subsidiary
and stockholders' equity.
Although net income during the first half of 1994 was 12 percent
higher than net income for the same period in 1993, cash provided
by operating activities was 26 percent lower. The following
events which occurred during the first six months of 1994
contributed significantly to this reduction in cash from
operating activities: $26 million in payments for the performance
incentive program introduced in 1993; $45 million in payments for
21
<PAGE>
previously recorded contingencies; $7 million in pension
contributions; and a 14 percent increase in accounts and notes
receivable. During the first six months of 1994, capital
expenditures and dividends exceeded cash from operating
activities by $219 million. Even though cash provided by
operating activities during the first six months of 1994 was
lower than the same period in 1993, cash and cash equivalents
increased $9 million during the first six months of the year.
During 1993, Phillips issued $850 million of fixed rate debt in
the public market, extending debt maturities at low interest
rates and using the proceeds to refinance more costly long-term
debt, repay borrowings under its revolving bank lines of credit,
and reduce the percentage of the company's total debt that would
be exposed to interest rate fluctuations. This reduction of the
company's floating rate debt has also enabled the company to
reduce the number and amount of its bank credit lines. In April
1994 the company secured more favorable commitment fees and
interest rates by replacing four of its outstanding bank credit
lines totaling $1.4 billion, with one $800 million facility with
similar terms and conditions. Also during April, the LTSSP
refinanced its outstanding notes payable issued in 1988 by
signing a $131 million term loan with annual installments
extending through 1998. The refinancing was completed on May 16.
As of June 30, 1994, the company had drawn approximately
$380 million under its committed credit facilities with major
banks, with approximately $720 million still available to be
drawn. In addition, the company had issued $103 million under
its $250 million commercial paper program at June 30. Phillips
continues to maintain its various committed bank lines of credit
and to draw upon these credit lines instead of maintaining higher
levels of cash.
Currently the company is negotiating the sale and leaseback of a
substantial portion of its tank and hopper railcar fleet, its
corporate aircraft, and certain of its airport refueling tank
trucks. The transaction is estimated to result in a before-tax
cash inflow of approximately $110 million and is anticipated to
be completed during the third quarter of 1994.
22
<PAGE>
Capital Spending
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
------------------ ----------------
E&P $200 215 358 339
GPM 22 18 44 28
RM&T 22 18 34 41
Chemicals 26 51 44 101
Corporate and Other 6 5 9 8
- -----------------------------------------------------------------
$276 307 489 517
=================================================================
United States $184 234 314 387
Foreign 92 73 175 130
- -----------------------------------------------------------------
$276 307 489 517
=================================================================
Phillips and its co-venturer were awarded leases on nine
undeveloped subsalt blocks in the Gulf of Mexico in April 1994,
in which Phillips will have a 50 percent working interest. In a
separate transaction, through the exercise of a buy-in option,
the company also obtained a 37.5 percent working interest in
another subsalt prospect. Total net cost of these acquisitions
was $38 million.
The company is a co-venturer in the Point Arguello field,
offshore California. Interim tankering to transport crude oil
from Gaviota to Los Angeles was suspended in February when the
requirements of the interim tankering permit--sufficient
throughput commitments to a pipeline and construction permits for
the pipeline--were not met. Although other Point Arguello
producers executed a Throughput and Deficiency Agreement with a
pipeline company in May, all permits required to construct the
pipeline must be obtained before interim tankering can resume,
now estimated to be the second quarter of 1995 at the earliest.
Although Phillips had previously estimated that the loss of
interim tankering would impact the company's production by 4,600
barrels of oil per day (BOPD), at this time the estimate has been
lowered to less than 1,000 BOPD, due to greater than anticipated
availability of viable onshore transportation and markets.
A tentative agreement between Phillips Petroleum Company Norway,
as operator of the Phillips Norway Group (PNG), and the Norwegian
Ministry of Industry and Energy (MIE) was reached on June 17,
1994, regarding the redevelopment of Ekofisk. Submitted in March
of this year, the plan projects significantly reduced operating
costs and will allow the maximum long-term recovery of Ekofisk
field reserves. Formal approval of the redevelopment plan is
expected in the fall session of the Norwegian Parliament.
23
<PAGE>
The agreement will extend the PNG's production license for the
Ekofisk area fields from its current expiration in 2011 to the
year 2028, and will eliminate the royalty charged on oil and
natural gas liquids production as of the completion of the
project, currently estimated for late 1998. The MIE also has
agreed to recommend to the Norwegian Parliament that the Kingdom
of Norway fund 5 percent of the Ekofisk redevelopment
expenditures, and in return receive a 5 percent direct interest
in the production license starting January 1, 1999. Using the
premises in the Plan for Development and Operation filed with the
Norwegian government in March 1994, additional recoverable
reserves in the production license after 2011 are estimated at
more than 280 million gross barrels of oil equivalent. Phillips
will have an approximate 35 percent interest, after deduction of
a pro-rata share of the Norwegian government's 5 percent direct
interest. The actual volumes of oil, gas and natural gas liquids
recorded on the books of the company after formal approval of the
plan could be different because of prices, costs and other
technical factors known at the time the reserves are recorded.
In addition, the MIE has agreed to extend the oil and gas
pipeline licenses currently held by Norpipe a.s to the year 2028,
subject to increased state ownership and the modernization of
certain tariff principles to make the pipeline more attractive to
future third party business. The license for the oil pipeline,
which extends from Ekofisk to Teesside, England, would have
expired in 2005, and the gas transportation pipeline, which
connects Ekofisk to Emden, Germany, would have expired in 2007.
Although Norpipe is currently owned 50 percent by PNG and
50 percent by Statoil, once the original expiration dates of the
licenses are reached, the agreement gives 40 percent ownership of
the pipelines to the Norwegian State, with 30 percent each
retained by PNG and Statoil.
The plan provides for the construction of two new platforms--a
wellhead platform to be completed in 1996, and a combined process
and transportation platform to be completed in 1998, linked with
the existing Ekofisk Complex. The estimated cost of the Ekofisk
redevelopment is approximately $3 billion, with Phillips' share
of the cost being approximately $1.1 billion. The company
expects to fund the capital costs associated with the plan within
the context of its overall funding plans. This is expected to
include the utilization of revolving credit lines and after-tax
operating cash flows. Most of the Ekofisk redevelopment costs
will be capitalized, and under the Norwegian tax system
applicable to oil and gas production, capital cost recovery
deductions are permitted for 93 percent of such costs over a
period of six years, commencing with the year in which the
relevant capital expenditure is made.
24
<PAGE>
Contingencies
Legal and Tax Matters
The company continues to defend claims made by plaintiffs
resulting from the October 23, 1989, explosion and fire at
Phillips 66 Company's HCC facilities. All suits involving
fatalities and most of those involving serious physical injury
have been settled. The total loss from all HCC claims, including
those settled and those which remain, has exceeded the aggregate
amount of the company's liability insurance. Most of the
approximately 75 remaining claimants seek compensatory and
punitive damages, primarily for psychological injury.
Because of the nature of personal injury litigation, the company
cannot predict with certainty the amount of damages or other
costs it may incur in settling or trying the remaining claims.
Phillips believes, however, that should the ultimate cost of the
disposition of such claims, either by settlement or after trial,
exceed amounts for which the company has made provision, such
excess would not have a material adverse impact on the company's
financial position.
Phillips provides for costs related to contingencies when a loss
is probable and the amounts can be reasonably estimated. The
ultimate resolution of known contingencies, to the extent not
previously provided, is not expected to have a material adverse
impact on the company's financial position. However, such
additional costs could be material to the operating results or
cash flows of a particular year or quarter.
Environmental
Most aspects of the businesses in which the company engages are
subject to various foreign, federal, state and local
environmental laws and regulations. Similar to other companies
in the petroleum and chemical industries, the company incurs
costs for preventive and corrective actions at facilities and
waste disposal sites.
Phillips may be obligated to take remedial action as the result
of the enactment of laws, such as the federal Superfund law, the
issuance of new regulations, or as a result of leaks and spills.
In addition, an obligation may arise when a facility is closed or
sold. Most of the expenditures to fulfill these obligations
relate to facilities and sites where past operations followed
practices and procedures that were considered appropriate under
regulations, if any, existing at the time, but will now require
investigatory or remedial work to adequately protect the
environment or address new regulatory requirements.
25
<PAGE>
At year-end 1993, Phillips reported 63 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP). Since then, seven of these
sites have been resolved through consent decrees, deposits into
trust funds or otherwise. Two sites were also added during the
six-month period. Of the sites remaining at June 30, 1994, the
company believes it has a legal defense or its records indicate
no involvement for 12 sites. At 12 other sites, present
information indicates that it is reasonably likely that the
company's exposure is less than $100,000 per site. At 17 sites,
Phillips has had no communication or activity with government
agencies or other PRPs in more than two years. Of the remaining
sites, the company has provided for any probable costs that can
be reasonably estimated. Any additional costs related to these
sites are not expected to be material to the company's financial
position; however, such additional costs could be material to
the operating results or cash flows of a particular year or
quarter.
For those sites where it is probable that future costs will be
incurred and these costs can be reasonably estimated, liabilities
have been recorded in the consolidated balance sheet. At
June 30, 1994, accruals of $11 million had been made for the
company's PRP sites. In addition, the company has accrued
$93 million for other planned remediation activities, including
sites where no claims have been asserted, and $6 million for
other environmental litigation, for total environmental accruals
of $110 million. No one site represents more than 15 percent of
the total.
Phillips does not consider the number of sites at which it has
been designated a PRP as a relevant measure of liability. Some
companies may be involved in few sites but have much larger
liabilities than companies involved in many more sites. Although
the liability of a PRP is generally joint and several, the
company is usually one of many companies cited as a PRP at these
sites, and has, to date, been successful in sharing cleanup costs
with other financially sound companies. Also, many of these
sites are still under investigation by the EPA or the state
agencies concerned. Prior to actual cleanup, the PRPs normally
assess site conditions, apportion responsibility and determine
the appropriate remediation. In some instances, Phillips may
have no liability or attain a settlement of liability.
The actual cleanup costs generally occur after the PRPs obtain
EPA or equivalent state agency approval. After an investigation
and assessment, the company makes accruals for planned
remediation activities for sites where it is probable that future
costs will be incurred and these costs can be reasonably
estimated.
The ultimate costs of remediation of sites for which the company
has been designated as a PRP is not determinable due to such
unknown factors as the magnitude of cleanup costs, the time and
26
<PAGE>
extent of remedial actions that may be required, and the
company's liability in proportion to other responsible parties.
However, based on information available at this time, the
ultimate resolution of these matters, to the extent not
previously provided, is not expected to have a material adverse
impact on the company's financial position. Such additional
costs could be material to the operating results or cash flows of
a particular year or quarter.
OUTLOOK
The Norwegian parliament is expected to approve the terms of the
tentative agreement for the redevelopment of Ekofisk in the fall.
When the new operating facilities begin production in 1998,
increases in depreciation, depletion and amortization expense
will occur, but operating expenses should decrease. Production
from the current Ekofisk facilities and resulting earnings are
expected to be lower in the third quarter due to a two-week shut-
down for regular maintenance in August.
In September 1993, Phillips and its co-venturer announced a
subsalt oil discovery on the Mahogany prospect in the Gulf of
Mexico, offshore Louisiana. The company announced in early
August 1994 that the Mahogany #2 appraisal well also encountered
hydrocarbons in a separate zone at test rates of 4,366 barrels of
oil per day and 5.315 million cubic feet of gas per day. A third
well is expected to begin drilling immediately. The company
holds a 37.5 percent working interest.
Testing on the Teak subsalt prospect, located 80 miles off the
coast of Louisiana, was completed during the second quarter.
Although the well tested up to 3,742 barrels of oil a day and
5.988 million cubic feet of gas per day, the well was abandoned,
and further evaluation is needed to determine if the Teak
prospect is a commercial discovery. Phillips, the operator, has
a 50 percent working interest in the prospect.
Phillips Sumika Polypropylene Company (PSPC), a partnership
formed in 1992 between Phillips and Sumika Polymers America
Corporation (Sumika), plans to build a new facility in Pasadena,
Texas, capable of producing approximately 270 million pounds of
polypropylene a year. Construction is scheduled to begin in
October 1994 and be completed in the first half of 1996. In
exchange for Sumika agreeing to totally fund the new facility,
Phillips contributed its existing polypropylene business to PSPC,
including the existing 480 million pounds a year polypropylene
facility at HCC, on August 1, 1994. The new manufacturing
facility will utilize Sumitomo's proprietary gas phase process,
and along with production from the existing facility, will
increase the partnership's total production to about 750 million
pounds annually.
27
<PAGE>
Phillips' results for the first six months of 1994 reflect the
benefit of the company's ongoing efforts to contain costs.
Controllable costs are lower in 1994, even with higher production
levels associated with strengthening markets and after adjusting
for the effect of asset sales. Process improvements are
currently taking place which will lead to further cost reductions
across all the company's business lines.
Although crude oil prices dropped during the first quarter,
continuing a trend begun in 1993, prices trended upward during
the second quarter and into the third as a result of increased
demand and supply uncertainties. At April 1, 1994, the company's
posted West Texas Intermediate crude oil price was $13.25, but by
August 2, 1994, prices had risen to $18.75. The increased demand
has been fueled in part by the recovering U.S. economy.
Political unrest and an oil workers strike in Nigeria have
contributed to speculation in world crude oil markets, causing
prices to rise in recent weeks. Nigeria is the company's third
largest production source--generating roughly 10 percent of the
company's total crude oil production. The company, in concert
with the operator, continues to closely monitor the political and
economic uncertainties there.
To meet its liquidity requirements, including funding its capital
program, the company will look primarily to cash generated from
operations, financing and asset sales.
28
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following is a description of a legal proceeding involving
governmental authorities under federal, state and local laws
regulating the discharge of materials into the environment.
While it is not possible to predict the outcome of such
proceedings, if all were decided adversely to the company, there
would be no material effect on its consolidated financial
position. Nevertheless, such proceedings are reported pursuant
to the Securities and Exchange Commission's regulations.
In June 1994, Phillips Puerto Rico Core Inc., a wholly owned
subsidiary of the company, received a Compliance Order from the
U.S. Environmental Protection Agency (EPA) alleging violations of
the Clean Air Act Amendments of 1990 and associate regulations at
the Puerto Rico Core Complex in Guayama, Puerto Rico. The
Compliance Order did not assess penalties. The EPA has now
advised it is contemplating an additional enforcement action and
may seek penalties in excess of $100,000. Phillips Puerto Rico
Core is working with EPA in regard to the facility and to reduce
the amount of any penalties.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual stockholders' meeting on May 9, 1994.
A brief description of each proposal and the voting results
follow:
A company proposal to elect fourteen directors.
For Against & Withheld
----------------------------------
W. W. Allen 222,337,593 4,368,115
Norman R. Augustine 222,681,845 4,023,863
George B. Beitzel 222,034,086 4,671,622
C. L. Bowerman 221,907,845 4,797,863
Robert E. Chappell, Jr. 222,582,131 4,123,577
Lawrence S. Eagleburger 222,094,512 4,611,196
James B. Edwards 222,206,609 4,499,099
Larry D. Horner 222,323,829 4,381,879
E. Douglas Kenna 222,297,506 4,408,202
J. J. Mulva 222,478,831 4,226,877
D. J. Tippeconnic 221,011,970 5,693,738
Randall L. Tobias 222,193,210 4,512,498
Victoria J. Tschinkel 222,264,432 4,441,276
J. L. Whitmire 221,239,406 5,466,302
29
<PAGE>
A company proposal to approve the designation of Ernst & Young
as independent auditors for 1994.
For 221,974,190
Against 3,301,535
Abstentions 1,429,983
Not Voted 0
A shareholder proposal sponsored by The General Board of Church
and Society of the United Methodist Church and co-sponsored by
the Franciscan Health System of the Sisters of St. Francis of
Philadelphia, to sign and implement the CERES Principles, a set
of environmental principals put forth by the Coalition for
Environmentally Responsible Economies.
For 24,005,784
Against 172,084,089
Abstentions 8,596,501
Not Voted 22,019,334
All fourteen directors were elected, the independent public
accountants proposed by the company were approved, and the CERES
Principles were rejected. Effective July 28, 1994, Mr. D. J.
Tippeconnic resigned as a director and Executive Vice President
of the company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
12 Computation of Ratio of Earnings to Fixed Charges
Reports on Form 8-K
- -------------------
During the three months ended June 30, 1994, the company has not
filed any reports on Form 8-K.
30
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PHILLIPS PETROLEUM COMPANY
/s/ L. F. Francis
----------------------------------
L. F. Francis
Controller and General Tax Officer
(Chief Accounting and Duly
Authorized Officer)
August 8, 1994
31
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Exhibit 12
PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES
TOTAL ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars
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Six Months Ended June 30
1994 1993
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(Unaudited)
Earnings Available for Fixed Charges:
Income before income taxes and subsidiary
stock transaction $369 407
Equity in undistributed earnings of
less-than-fifty-percent-owned companies 1 6
Fixed charges, excluding capitalized
interest and the portion of the
preferred dividend requirements of a
subsidiary not deducted from pretax
income* 185 180
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$555 593
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Fixed Charges:
Interest and expense on indebtedness,
excluding capitalized interest $151 141
Capitalized interest 5 4
Preferred dividend requirements of
a subsidiary 31 35
One-third of rental expense, net of
subleasing income, for operating leases 13 17
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$200 197
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Ratio of Earnings to Fixed Charges 2.8 3.0
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*Includes amortization of capitalized interest totaling approximately
$5 million in 1994 and $6 million in 1993.
Earnings available for fixed charges include, if any, the company's equity in
losses of companies owned less than fifty percent and having debt for which
the company is contingently liable. Fixed charges include the company's
proportionate share, if any, of interest relating to the contingent debt.
