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 March 31, 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 had 261,496,670 shares of common stock, $1.25 par value,
outstanding at April 30, 1994.
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Revenues
Sales and other operating revenues $2,884 3,029
Equity in earnings of affiliated companies 17 21
Other revenues 23 33
- -----------------------------------------------------------------
Total Revenues 2,924 3,083
- -----------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 1,679 1,823
Production and operating expenses 523 537
Exploration expenses 45 38
Selling, general and administrative expenses 110 165
Depreciation, depletion, amortization and
retirements 204 194
Taxes other than income taxes 71 71
Interest and expense on indebtedness 76 64
Preferred dividend requirements of subsidiary 8 8
- -----------------------------------------------------------------
Total Costs and Expenses 2,716 2,900
- -----------------------------------------------------------------
Income before income taxes and subsidiary
stock transaction 208 183
Gain on subsidiary stock transaction 20 -
- -----------------------------------------------------------------
Income before income taxes 228 183
Provision for income taxes 101 122
- -----------------------------------------------------------------
Net Income $ 127 61
=================================================================
Per Share of Common Stock
Net Income $ .49 .23
=================================================================
Dividends paid .28 .28
Average Common Shares Outstanding
(in thousands) 261,426 260,355
- -----------------------------------------------------------------
See Notes to Financial Statements.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-------------------------
March 31 December 31
1994 1993*
-------------------------
Assets
Cash and cash equivalents $ 116 119
Accounts and notes receivable (less
allowances: 1994--$14; 1993--$14) 1,358 1,248
Inventories 503 538
Deferred income taxes 166 170
Prepaid expenses and other current
assets 113 118
- -----------------------------------------------------------------
Total Current Assets 2,256 2,193
Investments and long-term receivables 631 543
Properties, plants and equipment (net) 7,888 7,961
Deferred income taxes 94 98
Deferred charges 74 73
- -----------------------------------------------------------------
Total $10,943 10,868
=================================================================
Liabilities
Accounts payable $ 1,151 1,199
Long-term debt due within one year 18 18
Accrued income and other taxes 895 858
Other accruals 197 196
- -----------------------------------------------------------------
Total Current Liabilities 2,261 2,271
Long-term debt 3,238 3,208
Accrued dismantlement, removal and
environmental costs 538 528
Deferred income taxes 927 901
Other liabilities and deferred credits 882 910
- -----------------------------------------------------------------
Total Liabilities 7,846 7,818
- -----------------------------------------------------------------
Preferred Stock of Subsidiary and Other
Minority Interests 347 362
- -----------------------------------------------------------------
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 978 977
Treasury stock (at cost: 1994--
15,837,118 shares; 1993--
15,700,279 shares) (887) (885)
Foreign currency translation adjustments (11) (14)
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (480) (487)
Retained earnings 2,804 2,751
- -----------------------------------------------------------------
Total Stockholders' Equity 2,750 2,688
- -----------------------------------------------------------------
Total $10,943 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
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Cash Flows from Operating Activities
Net income $ 127 61
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, amortization
and retirements 204 194
Dry hole costs and leasehold impairment 20 13
Deferred taxes 12 (1)
Increase in accounts and notes
receivable (127) (1)
Decrease in inventories 19 22
Decrease (increase) in prepaid expenses
and other current assets 10 (24)
Decrease in accounts payable (41) (71)
Increase in taxes and other accruals 29 9
Other (63) (2)
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 190 200
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures, including dry
hole costs (213) (210)
Property dispositions 10 (1)
Investment purchases (4) (2)
Investment sales 69 47
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (138) (166)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 471 650
Repayment of debt (439) (645)
Issuance of company stock - 4
Dividends paid (73) (73)
Other (14) (10)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (55) (74)
- -----------------------------------------------------------------
Decrease in Cash and Cash Equivalents (3) (40)
Cash and cash equivalents at beginning of
period 119 131
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 116 91
=================================================================
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--Inventories
Inventories consisted of the following:
Millions of Dollars
-----------------------
March 31 December 31
1994 1993
-----------------------
Crude oil and petroleum products $180 183
Chemical products 230 252
Materials, supplies and other 93 103
- -----------------------------------------------------------------
$503 538
=================================================================
Note 3--Properties, Plants and Equipment
Properties, plants and equipment included the following:
Millions of Dollars
-----------------------
March 31 December 31
1994 1993
-----------------------
Properties, plants and equipment
(at cost) $18,020 18,038
Less accumulated depreciation,
depletion and amortization 10,132 10,077
- -----------------------------------------------------------------
$ 7,888 7,961
=================================================================
Note 4--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 that will be collected during 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 in the first
quarter. As a result of this transaction, PPSC is now accounted
for using the equity method. Deferred taxes have not been
4
<PAGE>
provided on the gain because PPSC is a foreign subsidiary and 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 5--Debt
At March 31, 1994, the company had $1.7 billion of committed
credit facilities with major banks, with $1.4 billion available
to be drawn. In addition, the company has a $250 million
committed letter-of-credit-supported commercial paper program
under which $52 million had been issued at March 31, 1994.
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.
Also during April, the Long-Term Stock Savings Plan (LTSSP)
signed a $131 million term loan agreement that will be used to
refinance its outstanding notes payable issued in 1988. The
notes will be redeemed on May 16. The new term loan will be
repaid in annual installments through the year 1998. The company
continues to guarantee the payment of the LTSSP debt.
Note 6--Income Taxes
The company's effective tax rate for the three-month period ended
March 31, 1994, was 44 percent, compared with 67 percent for the
same period a year ago. The 1994 effective tax rate reflected a
higher proportion of domestic income that was taxed at lower
rates, compared to foreign tax rates.
Note 7--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 the 1986 and 1990
Stock Plans in that no further awards will be granted under those
plans. Options issued 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
5
<PAGE>
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 (at exercise prices
from $12.63 to $35.00 per share) 6,993,616 6,504,166
================================================================
Options exercisable
March 31 (at exercise prices
from $12.63 to $28.57 per share) 3,903,564 3,784,275
- ----------------------------------------------------------------
SARs under option,
January 1 196,616 332,588
SARs forfeited - (15,656)
- ----------------------------------------------------------------
SARs under option, all exercisable
March 31 (at exercise prices
from $12.63 to $16.25 per share 196,616 316,932
================================================================
Note 8--Contingent Liabilities
Environmental
The company is subject to loss contingencies pursuant to federal,
state and local environmental laws and regulations. These
include 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 such factors as the unknown
magnitude of cleanup costs, the unknown time and extent of such
remedial actions that may be required, and the determination of
the company's liability in proportion to other responsible
parties.
6
<PAGE>
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 120 remaining claimants seek
compensatory and punitive damages, primarily for psychological
injury.
Based upon the company's most recent assessment of the HCC
claims, 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. The company has made
provision for such excess. Because of the nature of personal
injury litigation, the company cannot predict with certainty the
amount of damages or other costs that it may incur in settling or
trying the remaining claims.
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 Litigation
The company is a party to a number of other legal proceedings,
including tax proceedings, pending in various courts or agencies
for which no provision has been made. Costs related to
contingencies are provided when a loss is probable and the amount
is reasonably estimable.
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.
7
<PAGE>
Note 9--Cash Flow Information
Cash payments and noncash investing and financing activities for
the three-month periods ended March 31 were as follows:
Millions of Dollars
-------------------
1994 1993
-------------------
Cash payments
Interest
Debt $55 52
Taxes and other 24 35
- -----------------------------------------------------------------
$79 87
=================================================================
Income taxes $82 108
- -----------------------------------------------------------------
Noncash financing activities
Accrued expenditures for two liquefied
natural gas tankers based on percentage
of completion $ - 8
- -----------------------------------------------------------------
Treasury stock awards canceled under
incentive compensation plans (5) -
- -----------------------------------------------------------------
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 is:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993*
-------------------
Exploration and Production (E&P)
United States $ 66 79
Foreign 19 51
- -----------------------------------------------------------------
85 130
Gas Gathering, Processing and Marketing (GPM) 4 17
Refining, Marketing and Transportation (RM&T) 37 8
Chemicals 74 5
Corporate and Other (73) (99)
- -----------------------------------------------------------------
Net Income $127 61
=================================================================
*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 March 31,
1994, was $127 million, compared with $61 million for the same
period in 1993. Earnings included the following special items on
an after-tax basis:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Gains on asset sales $ - 20
Gain on subsidiary stock transaction 20 -
Work force reduction charges (5) (22)
Foreign currency losses - (1)
Other items 3 7
- -----------------------------------------------------------------
Total special items $ 18 4
=================================================================
Excluding the above special items, operating income was
$109 million for the three-month period ended March 31, 1994,
compared with $57 million a year ago.
Improved operating performance in the company's RM&T and
Chemicals operations was primarily responsible for a 91 percent
increase in operating income in the first quarter of 1994.
9
<PAGE>
Compared with the first quarter of 1993, crude oil prices were
significantly lower in the first quarter of 1994. Worldwide
crude oil sales prices averaged $12.67 per barrel, nearly $4.50
lower than a year ago. Oversupply caused the price of oil to
drop steadily throughout 1993, and this trend continued in the
first quarter of 1994, though crude prices have improved in
recent weeks. Because of the drop in prices, E&P's operating
income dropped 26 percent compared with a year ago. Along with
crude oil, natural gas liquids (NGL) prices trended lower
throughout 1993 and into the first quarter of 1994, resulting in
lower operating income from GPM.
The company saw substantial improvement in operating income from
downstream operations compared with a year ago. In the company's
RM&T operations, falling crude oil prices provided much lower
feedstock costs, which improved margins and resulted in improved
operating income from the refineries. In Chemicals, sales
volumes were up for key products such as ethylene, polyethylene
and polypropylene; margins improved in its aromatics operations;
and licensing income increased due to the granting of a
polypropylene license.
Three Months Ended
March 31
--------------------
1994 1993
--------------------
Phillips at a Glance
Crude oil production (MBD)
U.S. 91 98
Foreign 116 106
- -----------------------------------------------------------------
207 204
=================================================================
Natural gas production (MMCFD)
U.S. 1,077 1,024
Foreign 409 458
- -----------------------------------------------------------------
1,486 1,482
=================================================================
Natural gas liquids production -
worldwide (MBD) 159 155
Liquefied natural gas sales (MMCFD) 114 113
Refinery utilization rate (%) 94 97
Automotive gasoline sales -
U.S. (MBD) 282 296
Distillate sales - U.S. (MBD) 121 97
Liquefied petroleum gas sales -
U.S. (MBD) 122 122
Ethylene sales (MMlbs)* 298 255
Polyethylene sales (MMlbs) 414 365
Propylene sales (MMlbs) 120 134
Polypropylene sales (MMlbs) 107 70
*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.
10
<PAGE>
Segment Results
E&P Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Reported net income $ 85 130
Less special items 4 21
- -----------------------------------------------------------------
Operating income $ 81 109
=================================================================
Operating income for the first quarter of 1994 was down when
compared with the first quarter of 1993 for the company's
worldwide E&P operations. Although U.S. natural gas prices were
higher, they could not overcome the effect of significantly lower
worldwide crude oil sales prices.
Sales prices, exploration expenses and operating statistics are:
Three Months Ended
March 31
---------------------
1994 1993
---------------------
Sales Prices
Crude oil (per barrel)
United States $10.98 15.40
Foreign 13.84 18.41
Worldwide 12.67 17.09
Natural gas--lease
(per thousand cubic feet)
United States 2.02 1.84
Foreign 2.31 2.42
Worldwide 2.11 2.04
Millions of Dollars
-------------------
Worldwide Exploration Expenses
Geological and geophysical $ 24 23
Leasehold impairment 5 6
Dry holes 15 7
Lease rentals 1 2
- -----------------------------------------------------------------
$ 45 38
=================================================================
11
<PAGE>
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Thousands of
Barrels Daily
-------------------
Operating Statistics
Crude Oil Produced
United States 91 98
Norway 81 66
United Kingdom 5 6
Africa 25 26
Other areas 5 8
- -----------------------------------------------------------------
207 204
=================================================================
Natural Gas Liquids Produced
United States 1 6
Norway 8 7
Other areas 1 1
- -----------------------------------------------------------------
10 14
=================================================================
Millions of
Cubic Feet Daily
--------------------
Natural Gas Produced
United States (less gas
equivalent of liquids
shown above) 1,077 1,024
Norway* 262 311
United Kingdom* 96 77
Other areas 51 70
- -----------------------------------------------------------------
1,486 1,482
=================================================================
*Dry basis.
Liquefied Natural Gas Sales 114 113
- -----------------------------------------------------------------
12
<PAGE>
U.S. E&P Millions of Dollars
- -------- -------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Reported net income $ 66 79
Less special items 4 1
- -----------------------------------------------------------------
Operating income $ 62 78
=================================================================
The decrease in operating income for the first quarter of 1994,
compared with the same period a year ago, was primarily due to
lower crude oil sales prices, partially offset by higher natural
gas sales prices. The company's U.S. crude oil sales prices
averaged $10.98 per barrel in the first quarter of 1994, a
29 percent drop from a year ago. The negative effect of the drop
in crude oil prices was mitigated by a 10 percent increase in
natural gas sales prices. Natural gas sales prices reached
$2 per thousand cubic feet in the second quarter of 1993, and
have remained near the $2 level.
U.S. crude oil production was lower in the first quarter of 1994,
compared with the first quarter of 1993, due primarily to normal
field declines and asset sales. U.S. natural gas production was
up 5 percent, due in part to increased production from the San
Juan Basin.
Special items in 1994 included a favorable settlement related to
a net profits interest, partially offset by a contingency
accrual. Special items in the first quarter of 1993 consisted of
a favorable tax settlement.
Foreign E&P Millions of Dollars
- ----------- -------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Reported net income $ 19 51
Less special items - 20
- -----------------------------------------------------------------
Operating income $ 19 31
=================================================================
Operating income decreased in the first quarter of 1994, compared
with the same period a year ago, primarily due to lower crude oil
sales prices. Those prices ended the quarter at an average of
under $14 per barrel, 25 percent lower than the first quarter of
1993.
Foreign crude oil production was up in the first quarter of 1994,
compared with the first quarter of 1993, due primarily to
increased production from Norway, which was up over 20 percent,
mostly due to the start-up of the Embla field in the spring of
1993. The increase was partly offset by loss of production due
13
<PAGE>
to asset sales in Egypt, Australia and Indonesia. Foreign
natural gas production was down this quarter compared with the
same period last year, due to Norway's increased reinjection of
produced gas, as part of the company's subsidence mitigation
strategy, coupled with lower buyer demand.
Special items in the first quarter of 1993 consisted of after-tax
asset sale gains of $20 million.
GPM Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Reported net income $ 4 17
Less preferred dividend requirements
of Phillips Gas Company (8) (8)
- -----------------------------------------------------------------
Operating income $ 12 25
=================================================================
The company's GPM operations are conducted primarily through GPM
Gas Corporation, a wholly owned subsidiary of Phillips Gas
Company. In December 1992, Phillips Gas Company issued preferred
stock, and the effect of the preferred dividend requirements has
been excluded in determining operating income.
Sales prices and operating statistics are:
Three Months Ended
March 31
---------------------
1994 1993
Sales Prices ---------------------
U.S. residue gas
(per thousand cubic feet) $ 2.12 1.86
U.S. natural gas liquids
(per barrel--unfractionated) 8.97 12.07
Millions of
Cubic Feet Daily
--------------------
Operating Statistics
Natural Gas Purchases
Outside Phillips 1,132 1,013
Phillips 208 209
- -----------------------------------------------------------------
1,340 1,222
=================================================================
Raw Gas Throughput 1,493 1,381
- -----------------------------------------------------------------
Residue Gas Sales
Outside Phillips 859 738
Phillips 86 94
- -----------------------------------------------------------------
945 832
=================================================================
14
<PAGE>
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Thousands of
Barrels Daily
-------------------
Natural Gas Liquids Production
From leasehold gas 22 23
From purchased gas 127 118
- -----------------------------------------------------------------
149 141
=================================================================
GPM's operating income was down for the first quarter of 1994,
compared with a year ago, due to lower NGL sales prices, partly
offset by higher residue gas sales prices and higher raw gas
throughput volumes. In addition, operating costs were up in the
first quarter of 1994, due in part to gathering fees the company
paid to GPM Gas Gathering L.L.C. (GGG) in 1994. To help fund
acquisitions, GPM and a group of institutional investors formed
GGG which is owned 50 percent by GPM. In 1993 GPM sold a portion
of its gas gathering assets in West Texas to GGG for
$138 million, and, effective January 1, 1994, began paying
gathering fees to GGG. GPM's operating costs also increased due
to newly acquired plants and systems and expansions of existing
systems that occurred throughout 1993. This expansion strategy
led to an 8 percent increase in raw gas throughput volumes
compared to a year ago.
RM&T Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Reported net income $ 37 8
Less special item - (3)
- -----------------------------------------------------------------
Operating income $ 37 11
=================================================================
Sales prices and operating statistics are:
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Automotive gasoline (per gallon) $.50 .59
Distillates (per gallon) .51 .57
Propane (per gallon) .34 .40
Refinery crude oil capacity
utilization 94% 97
15
<PAGE>
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Thousands of
Barrels Daily
-------------------
Operating Statistics
Refinery Operations
Crude Oil Refined 287 297
- -----------------------------------------------------------------
Petroleum Products Outside Sales*
United States
Automotive gasoline 259 269
Aviation fuels 33 32
Distillates 121 97
Propane 37 37
Other products 16 16
- -----------------------------------------------------------------
466 451
Foreign 60 54
- -----------------------------------------------------------------
526 505
=================================================================
*Amounts for 1993 have been restated to reflect that certain operations
previously a part of RM&T are now included in Chemicals.
Operating income was up 236 percent in the company's RM&T
operations, when compared with a year ago, due primarily to
better results from refining operations, as falling crude oil
prices resulted in 26 percent lower refinery feedstock costs.
These lower feedstock costs resulted in improved margins and
higher operating income from the company's refineries. However,
the company's overall refinery crude oil capacity utilization was
lower this quarter compared with a year ago, due to a maintenance
turnaround at the company's Borger refinery. The positive effect
of the lower feedstock costs was partially offset by lower
automotive gasoline and distillate sales prices. While these
prices were lower, their decline was somewhat mitigated by the
tightening of industry product supply as a result of a number of
refinery maintenance shutdowns during the quarter.
The special item in the first quarter of 1993 was an after-tax
contingency accrual of $3 million.
16
<PAGE>
Chemicals Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Reported net income $ 74 5
Less special items 21 -
- -----------------------------------------------------------------
Operating income $ 53 5
=================================================================
Chemicals operating income was up sharply in the first quarter of
1994, compared with the first quarter of 1993. An improving
economy and buyer anticipation of potential higher near-term
prices increased demand for olefin products in the first quarter
of 1994. In addition, the company enjoyed better margins from
its cyclics and aromatics operations.
In the company's plastics operations, the improving economy also
increased demand for plastics resins, thus easing somewhat the
negative effect of industry overcapacity experienced during 1993.
As a result, sales volumes of key plastics products, including
polyethylene and polypropylene, were higher, leading to better
operating results. In addition, operating income benefited
$18 million from the sale of a polypropylene license.
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Millions of Pounds
-------------------
Operating Statistics
Selected Outside Sales
Ethylene* 298 255
Polyethylene 414 365
Propylene 120 134
Polypropylene 107 70
*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.
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Thousands of
Barrels Daily
-------------------
Other Selected Product Outside Sales
Automotive gasoline (Puerto Rico
Core by-product) 23 27
Liquefied petroleum gas 85 85
Ethanes and pentanes 45 44
Natural Gas Liquids Processed 209 197
17
<PAGE>
Special items in the first quarter of 1994 included an after-tax
gain of $20 million from a subsidiary stock transaction.
Corporate and Other Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
Reported Corporate and Other $(73) (99)
Less special items (7) (14)
- -----------------------------------------------------------------
Adjusted Corporate and Other $(66) (85)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(25) (43)
Net interest (49) (45)
Other 8 3
- -----------------------------------------------------------------
Adjusted Corporate and Other $(66) (85)
=================================================================
Corporate general and administrative expenses for the first
quarter of 1994 were down from the same period a year ago. The
company's Performance Incentive Program (PIP) is now being accrued
by the operating segments, instead of being retained at Corporate,
and the 1993 accrual was overprovided and reversed at Corporate in
the first quarter of 1994. Also contributing to the decrease in
Corporate general and administrative expenses was increased direct
charges to the operating segments in 1994 compared with 1993,
along with lower charitable contributions and advertising
expenses.
Net interest represents interest income and expense, net of
capitalized interest. Net interest was higher in the first
quarter of 1994 due in part to reversals of contingency related
interest accruals in the first quarter of 1993.
Other consists primarily of the company's insurance operations,
along with income tax items that are not directly associated with
the operating segments on a stand-alone basis. The benefit of
these tax items was responsible for the improvement in Other in
the first quarter of 1994.
Special items in the first quarter of 1994 included an asset sale,
work force reduction charges and a contingency accrual. Special
items in the first quarter of 1993 included an after-tax work
force reduction charge of $22 million, partially offset by tax
related settlements and contingencies.
18
<PAGE>
Income Statement Analysis
Revenues
Total revenues for the three months ended March 31, 1994, were
$2.9 billion, compared with $3.1 billion for the same period in
1993. Sales and other operating revenues were down 5 percent
primarily due to lower crude oil and petroleum products sales
prices, partially offset by higher U.S. natural gas prices.
Total Costs and Expenses
Total costs and expenses were down 6 percent when comparing the
first quarter of 1994 with the first quarter of 1993. Purchase
costs decreased primarily due to lower refinery feedstock costs.
While production and operating expenses declined slightly,
exploration expenses were up 18 percent, due in part to dry holes
associated with the company's exploratory efforts in Italy and
Papua New Guinea. Selling, general and administrative expenses
were lower in the first quarter of 1994, due in part to lower work
force reduction charges. Interest expenses were up primarily due
to reversals of contingency related interest accruals in the first
quarter of 1993.
Income Taxes
The company's effective tax rate for the three-month period ended
March 31, 1994, was 44 percent, compared with 67 percent for the
same period a year ago. The 1994 effective tax rate reflected a
higher proportion of domestic income that was taxed at lower
rates, compared to foreign tax rates.
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-------------------------------
At At At
March 31 December 31 March 31
1994 1993 1993
-------------------------------
Current ratio 1.0 1.0 1.0
Long-term debt $3,238 3,208 3,796
Preferred stock of subsidiary $ 345 345 345
Stockholders' equity $2,750 2,688 2,698
Percent of long-term debt
to capital* 51% 51 56
Percent of floating-rate debt
to total debt 26% 25 45
*Capital includes long-term debt, preferred stock of subsidiary and
stockholders' equity.
19
<PAGE>
Although net income in first quarter 1994 was more than double
that of the same period in 1993, cash from operations declined
$10 million due to changes in working capital in the 1994 period.
Capital expenditures and dividends exceeded cash from operations
by $96 million in the first quarter of 1994. 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. Although long-term debt increased slightly from year-end
1993, it is down approximately 15 percent from March 31, 1993.
During 1993, Phillips issued $850 million of fixed rate debt in
the public market, using the proceeds to refinance more costly
long-term debt as well as to repay borrowings under its revolving
bank lines of credit, extending debt maturities at low interest
rates, and reducing 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.
At March 31, 1994, the company had $1.7 billion of committed
credit facilities with major banks. In April the company replaced
four of its outstanding bank credit lines, totaling $1.4 billion,
with one $800 million facility. Although the terms and conditions
of the new facility are similar to those of the replaced
facilities, the commitment fees and interest rates are more
favorable to the company. Also during April, the LTSSP signed a
$131 million term loan to refinance its outstanding notes payable
issued in 1988. The notes will be redeemed on May 16. The new
term loan will be repaid in annual installments through 1998.
As of April 30, 1994, the company had drawn approximately
$315 million under its committed credit facilities with major
banks, with approximately $800 million available to be drawn. In
addition, the company had issued $72 million under its
$250 million commercial paper program at April 30.
Capital Spending
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1994 1993
-------------------
E&P $158 124
GPM 22 10
RM&T 12 23
Chemicals 18 50
Corporate and Other 3 3
- -----------------------------------------------------------------
$213 210
=================================================================
United States $130 153
Foreign 83 57
- -----------------------------------------------------------------
$213 210
=================================================================
20
<PAGE>
Phillips is increasing its participation in the growing plastic
markets in Asia by expanding its Singapore polyethylene facility.
The expansion is being funded partly by a $93 million project loan
available to the Singapore company and partly by selling
additional equity of the Singapore company to other parties. The
sale of additional equity reduced Phillips' equity interest in the
company that owns the polyethylene facility from 85.7 percent to
50 percent. Phillips is proportionally responsible for cost
overruns and repayment of the project loan until the completion of
construction. After completion of construction, any borrowings
under the project loan become non-recourse to Phillips. This
expansion will more than double the Singapore facility's linear
polyethylene capacity to more than 800 million pounds a year and
is expected to be completed by 1997. The reduction in Phillips'
equity interest is not expected to have a material impact on its
operating results or liquidity.
Contingencies
Legal and Tax Matters
In February 1994, the U.S. Internal Revenue Service completed its
examination of the company's income tax returns for 1989 and 1990,
resulting in proposed adjustments totaling approximately
$80 million, including interest, all of which had been previously
accrued. The company paid the assessment and intends to file a
claim for refund contesting a significant portion of that amount.
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. Since December 31, 1993, the company has
settled or agreed in principle to settle about 275 claims,
including 191 on March 2, 1994. The March 2 agreement was for an
amount in excess of what the company had previously anticipated
for those claims. The agreement occurred in the third week of a
trial of 15 of the 191 claims, which commenced in February 1994.
The agreement resulted from a mediation of all 191 claims ordered
during the trial. Based upon the company's most recent assessment
of the HCC claims, 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. Based on this event
and the company's anticipated future liability exposure in the
remaining unsettled cases, an additional accrual was reflected in
1993. Most of the approximately 120 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
21
<PAGE>
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. The company, as well as other companies in
the petroleum or chemical industries, 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.
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). Of these sites, six were
resolved during the quarter through consent decrees, deposits into
trust funds or otherwise. Also during the quarter, two sites were
added. Of the 59 sites at March 31, 1994, the company believes it
has a legal defense or its records indicate no involvement for 13
sites. At 11 sites, present information indicates that it is
reasonably likely that the company's exposure is less then
$100,000 per site. At 15, Phillips has had no communication or
activity with government agencies or other PRPs in more than two
years. Of the remaining 20 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.
22
<PAGE>
For those sites where it is probable that future costs will be
incurred and these costs can be reasonably estimated, reserves
have been recorded in the consolidated balance sheet. At
March 31, 1994, accruals of $12 million had been made for the
company's PRP sites. In addition, the company has accrued
$90 million for planned remediation activities, including sites
where no claims have been asserted, and $13 million for other
environmental litigation, for total environmental accruals of
$115 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
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
In March, Phillips Petroleum Company Norway, as operator for the
Phillips Norway Group, submitted to the Norwegian government an
amended Plan of Development and Operation (PDO) for the Ekofisk
development. Discussions concerning the PDO are continuing. It
is anticipated that a recommendation about the Ekofisk development
will be made by the Norwegian authorities in the spring session of
the Norwegian Storting, or parliament, and that the Storting will
make its decision later in the spring session.
23
<PAGE>
In the first quarter of 1994, the company and its co-venturer
completed testing the Sunfish No. 3 delineation well. The Sunfish
No. 3 is the third delineation well on the northern portion of the
Sunfish prospect in the Cook Inlet of Alaska. The company is
currently evaluating the drilling results and recently acquired 3D
seismic data in order to reassess the reserves potential,
development options, and commercial potential of the Sunfish
prospect.
To meet its liquidity requirements, including funding its capital
program, the company will look primarily to cash generated from
operations, financing and asset sales.
Although crude oil prices have modestly improved in recent weeks,
the company anticipates that a continued strengthening of the
economy will be necessary to sustain the downstream prices and
margins enjoyed during the first quarter of 1994. The company
expects to continue to benefit from its cost-reduction efforts and
increased operating efficiencies.
24
<PAGE>
PART II. OTHER INFORMATION
Item 3. LEGAL PROCEEDINGS
The following is a description of 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.
On March 13, 1992, the Texas Water Commission (TWC) issued a
notice of violation to Phillips Petroleum Company's Sweeny,
Texas, refinery. The complaint alleged violations of Texas solid
and hazardous waste regulations by Phillips with respect to the
operations of the West Landfarm at the Sweeny refinery during the
period 1989-1990. This notice of violation was consolidated into
one action with a notice of violation issued on July 26, 1991, by
the TWC, which also alleged violations of the Texas solid and
hazardous waste regulations at Sweeny. These notices of
violation were reported in the company's Quarterly Report on Form
10-Q for the quarters ended September 30, 1991, and March 31,
1992. The Texas Water Commission and the Texas Air Control Board
merged to form the Texas Natural Resources Conservation
Commission (TWRCC). An Agreed Order was signed between the
company and the TNRCC effective April 12, 1994. The Agreed Order
requires Phillips, among other things, to undertake ground water
monitoring at the West Landfarm; to complete regulatory closure
of the West Landfarm; and to pay an administrative penalty of
$537,742. The penalty was paid to the TNRCC on April 29, 1994.
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 March 31, 1994, the company has not
filed any reports on Form 8-K.
25
<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
L. F. Francis
----------------------------------
L. F. Francis
Controller and General Tax Officer
(Chief Accounting and Duly
Authorized Officer)
May 9, 1994
26
<PAGE>
Exhibit 12
PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES
TOTAL ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars
---------------------------
Three Months Ended March 31
1994 1993
---------------------------
(Unaudited)
Earnings Available for Fixed Charges:
Income before income taxes and subsidiary
stock transaction $208 183
Equity in undistributed earnings of
less-than-fifty-percent-owned companies (5) (2)
Fixed charges, excluding capitalized
interest and the portion of the
preferred dividend requirements of a
subsidiary not previously deducted
from income* 96 87
---------------------------
$299 268
===========================
Fixed Charges:
Interest and expense on indebtedness,
excluding capitalized interest $ 79 67
Capitalized interest 2 2
Preferred dividend requirements of
a subsidiary 15 24
One-third of rental expense, net of
subleasing income, for operating leases 6 9
---------------------------
$102 102
===========================
Ratio of Earnings to Fixed Charges 2.9 2.6
- --------------------
*Includes amortization of capitalized interest totaling approximately
$3 million in 1994 and 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.
