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 September 30, 1994
---------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-720
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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 261,596,911 shares of common stock, $1.25 par value,
outstanding at October 31, 1994.
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
---------------------------------
Three Months Nine Months
Ended Ended
September 30 September 30
---------------------------------
1994 1993 1994 1993
---------------------------------
REVENUES
Sales and other operating revenues $3,315 3,170 9,194 9,429
Business interruption insurance - - - 14
Equity in earnings of affiliated
companies 23 17 62 55
Other revenues 9 5 43 57
- ---------------------------------------------------------------------
Total Revenues 3,347 3,192 9,299 9,555
- ---------------------------------------------------------------------
COSTS AND EXPENSES
Purchased crude oil and products 2,081 1,944 5,603 5,740
Production and operating expenses 529 576 1,568 1,651
Exploration expenses 52 74 151 150
Selling, general and
administrative expenses 139 119 365 436
Depreciation, depletion,
amortization and retirements 191 207 596 601
Taxes other than income taxes 71 72 202 219
Interest and expense on
indebtedness 42 70 187 205
Preferred dividend requirements
of subsidiary 8 8 24 24
- ---------------------------------------------------------------------
Total Costs and Expenses 3,113 3,070 8,696 9,026
- ---------------------------------------------------------------------
Income before income taxes,
subsidiary stock transaction
and extraordinary item 234 122 603 529
Gain on subsidiary stock
transaction - - 20 -
- ---------------------------------------------------------------------
Income before income taxes
and extraordinary item 234 122 623 529
Provision for income taxes 115 81 301 304
- ---------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 119 41 322 225
Extraordinary item - - - (2)
- ---------------------------------------------------------------------
NET INCOME $ 119 41 322 223
=====================================================================
PER SHARE OF COMMON STOCK
Income before extraordinary item $ .45 .16 1.23 .87
Extraordinary item - - - (.01)
- ---------------------------------------------------------------------
Net Income $ .45 .16 1.23 .86
=====================================================================
Dividends paid $ .28 .28 .84 .84
Average Common Shares Outstanding
(in thousands) 261,569 261,272 261,508 260,857
- ---------------------------------------------------------------------
See Notes to Financial Statements.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-------------------------
September 30 December 31
1994 1993*
-------------------------
ASSETS
Cash and cash equivalents $ 144 119
Accounts and notes receivable (less
allowances: 1994--$15; 1993--$14) 1,362 1,248
Inventories 541 538
Deferred income taxes 174 170
Prepaid expenses and other current
assets 77 118
- -----------------------------------------------------------------
Total Current Assets 2,298 2,193
Investments and long-term receivables 716 543
Properties, plants and equipment (net) 7,852 7,961
Deferred income taxes 92 98
Deferred charges 84 73
- -----------------------------------------------------------------
Total $11,042 10,868
=================================================================
LIABILITIES
Accounts payable $ 1,152 1,199
Long-term debt due within one year 26 18
Accrued income and other taxes 902 858
Other accruals 201 196
- -----------------------------------------------------------------
Total Current Liabilities 2,281 2,271
Long-term debt 3,213 3,208
Accrued dismantlement, removal and
environmental costs 555 528
Deferred income taxes 941 901
Other liabilities and deferred credits 848 910
- -----------------------------------------------------------------
Total Liabilities 7,838 7,818
- -----------------------------------------------------------------
PREFERRED STOCK OF SUBSIDIARY AND OTHER
MINORITY INTERESTS 350 362
- -----------------------------------------------------------------
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 991 977
Treasury stock (at cost: 1994--
15,672,938 shares; 1993--
15,700,279 shares) (868) (885)
Foreign currency translation adjustments 25 (14)
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (465) (487)
Retained earnings 2,825 2,751
- -----------------------------------------------------------------
Total Stockholders' Equity 2,854 2,688
- -----------------------------------------------------------------
Total $11,042 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
-------------------
Nine Months Ended
September 30
-------------------
1994 1993
-------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 322 223
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion, amortization
and retirements 596 601
Dry hole costs and leasehold impairment 66 63
Deferred taxes (13) (7)
Extraordinary items - 2
Increase in accounts and notes
receivable (132) (92)
Decrease (increase) in inventories (24) 36
Decrease in prepaid expenses and
other current assets 44 30
Decrease in accounts payable (52) (88)
Increase in taxes and other accruals 31 103
Other (49) 105
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 789 976
- -----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, including dry
hole costs (693) (760)
Proceeds from property insurance - 10
Property dispositions 124 257
Investment purchases (28) (3)
Investment sales 84 59
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (513) (437)
- -----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of debt 1,142 1,915
Repayment of debt (1,139) (2,237)
Issuance of company stock 8 16
Purchase of company stock (1) (2)
Dividends paid (220) (219)
Other (41) (27)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (251) (554)
- -----------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents 25 (15)
Cash and cash equivalents at beginning of
period 119 131
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 144 116
=================================================================
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 presentation of the
consolidated financial position of the company and its results of
operations and cash flows for such periods. All such adjustments
are of a normal and recurring nature.
Note 2--Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosures of contingent
assets and liabilities. Actual results could differ from the
estimates and assumptions used.
Note 3--Extraordinary Item
During the nine-month period ended September 30, 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 4--Inventories
Inventories consisted of the following:
Millions of Dollars
--------------------------
September 30 December 31
1994 1993
--------------------------
Crude oil and petroleum products $243 183
Chemical products 205 252
Materials, supplies and other 93 103
- -----------------------------------------------------------------
$541 538
=================================================================
4
<PAGE>
Note 5--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Millions of Dollars
--------------------------
September 30 December 31
1994 1993
--------------------------
Properties, plants and equipment
(at cost) $18,239 18,038
Less accumulated depreciation,
depletion and amortization 10,387 10,077
- -----------------------------------------------------------------
$ 7,852 7,961
=================================================================
Note 6--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. Deferred taxes have not been
provided on the gain because PPSC is a foreign subsidiary and the
temporary difference between the financial and tax bases in the
investment is essentially permanent in duration. Since this
transaction, PPSC has been accounted for using the equity method.
This deconsolidation did not have a material effect upon the
company's financial position.
Note 7--Debt
During the second quarter, the company secured more favorable
commitment fees and interest rates by replacing four of its bank
credit facilities, totaling $1.4 billion, with one facility of
$800 million. The terms of the new facility are similar to the
terms of the credit facilities terminated. At September 30,
1994, the company's committed credit facilities with major banks
totaled $1.1 billion, of which approximately $920 million was
available to be drawn. In addition, the company has a $250
million committed letter-of-credit-supported commercial paper
program under which $127 million had been issued as of
September 30, 1994.
Also during the second quarter, 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, but at a reduced cost.
Payment of the first installment was made on June 15, reducing
the outstanding balance to $114 million at September 30, 1994.
5
<PAGE>
During September, the company's LTSSP signed an agreement
amending a second term loan under which $397 million is
outstanding. The amended term loan requires repayment in annual
installments beginning in 1999 and has the same maturity as the
original term loan agreement entered into in 1990, but provides a
lower rate of interest. The company continues to guarantee
payment of the LTSSP debt.
Note 8--Business Interruption Insurance
The company recognized income from business interruption
insurance for the nine-month period ended September 30, 1993,
related to an April 1991 fire at the Sweeny, Texas refinery.
This represents the final settlement of all business interruption
insurance claims by the company related to this event.
Note 9--Transfer of Assets
On August 1, 1994, Phillips contributed its polypropylene assets
with a net book value of $107 million to Phillips Sumika
Polypropylene Company (PSPC), a partnership formed in 1992
between Phillips and Sumika Polymers America Corporation
(Sumika). Phillips and Sumika jointly control PSPC, and Phillips
accounts for its investment using the equity method of
accounting. No financial gain or loss was recognized on the
contribution. Sumika will fund the construction of a new PSPC
polypropylene facility in Pasadena, Texas. Sharing of net cash
flows, and gains and losses each period is dependent on the
relative contributions of both partners. The company's share of
net income and cash flows from the partnership will decrease as
Sumika funds construction of the new facility, but the company's
share will not fall below 50 percent. Revenues and cash flows
generated by these transferred assets through July 31, 1994, are
consolidated into the company's financial statements.
Note 10--Income Taxes
The company's effective tax rates for the three-month periods
ended September 30, 1994 and 1993, were 49 percent and
66 percent, respectively. The company's effective tax rates for
the nine-month periods ended September 30, 1994 and 1993, were
48 percent and 57 percent, respectively. The lower 1994
effective tax rates reflect a higher proportion of domestic
income to foreign income. Domestic income is taxed at relatively
lower rates than foreign income.
6
<PAGE>
Note 11--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.
7
<PAGE>
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 6,716,613 6,003,964
Options granted at
$29.50 to $34.82 per share 54,953 951
Options exercised at
$12.63 to $27.07 per share (226,912) (223,979)
Options forfeited (9,077) (29,126)
- ----------------------------------------------------------------
Shares under option
September 30 (at exercise prices
from $12.63 to $35.00 per share) 6,535,577 5,751,810
================================================================
Options exercisable
September 30 (at exercise prices
from $12.63 to $30.00 per share) 3,538,926 3,087,310
- ----------------------------------------------------------------
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 June 30 132,134 231,308
SARS forfeited (27,246) (9,000)
- ----------------------------------------------------------------
SARs under option
September 30 (at exercise prices
from $12.63 to $16.25 per share) 104,888 222,308
================================================================
SARS exercisable
September 30 (at exercise prices
from $12.63 to $16.25 per share) 104,888 222,308
- ----------------------------------------------------------------
8
<PAGE>
Note 12--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. In the future, the company may be involved in
additional environmental assessments, cleanups and proceedings.
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 35 remaining
claimants seek compensatory and punitive damages, primarily for
psychological injury.
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.
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.
In the case of all known contingencies, the company accrues a
charge for a loss when it is probable and the amount is
reasonably estimable. These accruals are not discounted for
delays in future payment and are not reduced for possible
insurance recoveries. Based on currently available information,
the company believes that it is remote that future costs related
to known contingent liability exposures will exceed current
accruals by an amount that would have a material adverse impact
on the company's financial statements.
As new facts concerning contingencies become known to the
company, the company reassesses its position both with respect to
accrued liabilities and other potential exposures. Estimates
that are particularly sensitive to future change include
contingent liabilities recorded for environmental remediation,
legal and tax matters. Estimated future environmental
remediation costs are subject to change 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
9
<PAGE>
responsible parties. Estimated future legal and tax costs are
subject to change as events evolve and as additional information
becomes available during the administrative and litigation
process.
Note 13--Cash Flow Information
Cash payments and noncash investing and financing activities for
the nine-month periods ended September 30 were as follows:
Millions of Dollars
-------------------
1994 1993
-------------------
Cash payments
Interest
Debt $174 168
Taxes and other 41 43
- -----------------------------------------------------------------
$215 211
=================================================================
Income taxes $259 320
- -----------------------------------------------------------------
Noncash investing and financing activities
Accrued expenditures for two liquefied
natural gas tankers based on percentage
of completion $ - 7
- -----------------------------------------------------------------
Treasury stock awards issued (canceled)
under incentive compensation plans (12) 16
- -----------------------------------------------------------------
Capitalized process license fee payable
in installments from 1993 to 1999 - 16
- -----------------------------------------------------------------
Contribution of noncash net assets to
equity method affiliate 107 -
- -----------------------------------------------------------------
10
<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 Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993* 1994 1993*
------------------ -----------------
Exploration and Production
(E&P)
United States $ 64 30 191 211
Foreign 10 24 44 101
- -----------------------------------------------------------------
74 54 235 312
Gas Gathering, Processing
and Marketing (GPM) (2) 10 - 39
Refining, Marketing and
Transportation (RM&T) 57 21 125 82
Chemicals 63 40 182 59
Corporate and Other (73) (84) (220) (267)
- -----------------------------------------------------------------
Income before
Extraordinary Item 119 41 322 225
Extraordinary Item - - - (2)
- -----------------------------------------------------------------
Net Income $119 41 322 223
=================================================================
*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
September 30, 1994, was $119 million, compared with $41 million
for the same period in 1993. For the nine-month period ended
September 30, 1994, consolidated net income was $322 million, up
from $223 million in the same period a year ago.
11
<PAGE>
Earnings included the following special items on an after-tax
basis:
Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Net gains (losses) on
asset sales $ (2) - (2) 22
Gain on subsidiary stock
transaction - - 20 -
Capital-loss carryforwards - - - 2
Work force reduction
charges (22) - (27) (26)
Foreign currency gains
(losses) - 2 1 (2)
Pending claims and
settlements 7 - 24 (13)
Incinerator project
writedown - (20) - (20)
Other items (5) 3 (4) 12
- -----------------------------------------------------------------
Total special items (22) (15) 12 (25)
Extraordinary item
Early retirement of debt - - - (2)
- -----------------------------------------------------------------
Total $(22) (15) 12 (27)
=================================================================
Excluding the above items, operating income was $141 million for
the third quarter of 1994, compared with $56 million in the third
quarter of 1993. For the nine-month period ending September 30,
operating income was $310 million in 1994, compared with
$250 million in 1993.
U.S. natural gas prices dropped sharply in the third quarter of
1994, and ended the quarter with average prices, for both lease
gas and residue gas, down 19 percent from the third quarter a
year ago. Natural gas prices declined due to several factors,
including an easing of demand, and an increasing of supply.
Although natural gas prices were down, E&P's earnings improved,
due in part to higher natural gas sales volumes and lower
exploration expenses, mainly dry holes. Lower residue gas
prices, combined with higher operating expenses due to higher
gathering fees, resulted in lower operating income from GPM.
RM&T operating income was up for the quarter, reflecting higher
gasoline margins during the third quarter. In addition, the
company's refineries turned in another strong operating
performance, running at a crude oil capacity utilization rate of
110 percent and contributing to higher sales volumes in the
quarter.
12
<PAGE>
In Chemicals, operating income was up 89 percent from the third
quarter last year, as the improving economy and industry
production problems kept demand strong for the company's olefins.
This strong demand led to both higher sales volumes and margins.
Also, sales volumes were up for cyclohexane and plastics. Demand
for polyethylene remains strong, though rising ethylene feedstock
costs are squeezing margins.
For the nine-month period ending September 30, 1994, E&P and GPM
results were lower than the first nine months of 1993 due
primarily to lower crude oil sales prices and lower residue gas
and natural gas liquids (NGL) sales prices, respectively. In
RM&T, higher automotive gasoline and distillate margins led to a
$30 million increase in operating income. In Chemicals, higher
olefins, cyclohexane and plastics sales volumes and much improved
margins for olefins and aromatics contributed to significantly
higher nine-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 Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Crude oil production (MBD)
United States 90 92 91 94
Foreign 106 108 112 107
- -----------------------------------------------------------------
196 200 203 201
=================================================================
Natural gas production
(MMCFD)
United States 1,013 887 1,031 965
Foreign 311 290 357 371
- -----------------------------------------------------------------
1,324 1,177 1,388 1,336
=================================================================
Natural gas liquids
production--worldwide
(MBD) 167 162 164 158
Liquefied natural gas
sales (MMCFD) 127 113 113 105
Refinery utilization
rate (%) 110 97 104 99
Automotive gasoline
sales--U.S. (MBD) 339 312 310 307
Distillate sales--
U.S. (MBD) 141 114 131 103
Liquefied petroleum gas
sales--U.S. (MBD) 108 107 108 106
Ethylene sales (MMlbs)* 293 253 871 793
Polyethylene sales--U.S.
(MMlbs) 345 273 1,003 801
Propylene sales (MMlbs) 185 95 394 343
*Includes amounts equal to Phillips' 50 percent interest in the
Sweeny Olefins Limited Partnership (SOLP), after exclusion of
amounts sold by SOLP to Phillips.
13
<PAGE>
Segment Results
E&P Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Reported net income $ 74 54 235 312
Less special items (12) 8 (2) 28
- -----------------------------------------------------------------
Operating income $ 86 46 237 284
=================================================================
Although crude oil prices for the third quarter of 1994 were, on
average, up from both the second quarter of 1994 and the third
quarter of last year, after peaking in July, prices trended
downward for the remaining months in the quarter. Prices
declined due to the easing of uncertainties surrounding the oil
workers strike and political unrest in Nigeria, coupled with
higher production from the North Sea following scheduled
maintenance. Thus after the price declines in August and
September, average crude oil prices for the quarter increased
only 4 percent from a year ago. Contributing to the improved
earnings were lower exploration expenses, lower U.S.
depreciation, depletion and amortization, beneficial tax credits
and higher liquefied natural gas revenues, partly offset by lower
U.S. natural gas revenues. U.S. natural gas revenues were lower,
as higher sales volumes were more than offset by lower prices.
Earnings also benefited from generally lower costs and expenses.
For the first nine months of 1994, lower crude oil revenues led
to lower operating income--17 percent lower than a year ago. On
a year-to-date basis, average worldwide crude oil sales prices
continued to lag behind those received last year--12 percent
lower.
Sales prices, exploration expenses and operating statistics for
worldwide E&P:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Sales Prices
Crude oil (per barrel)
United States $14.61 13.35 13.16 14.78
Foreign 16.91 16.81 15.45 17.89
Worldwide 15.86 15.30 14.45 16.50
Natural gas--lease (per
thousand cubic feet)
United States 1.65 2.03 1.84 1.97
Foreign 2.36 2.36 2.31 2.37
Worldwide 1.83 2.12 1.97 2.10
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<PAGE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Millions of Dollars
-------------------------------------
Worldwide Exploration
Expenses
Geological and geophysical $ 30 31 80 81
Leasehold impairment 7 5 19 16
Dry holes 13 36 47 47
Lease rentals 2 2 5 6
- -----------------------------------------------------------------
$ 52 74 151 150
=================================================================
Thousands of Barrels Daily
-------------------------------------
Operating Statistics
Crude Oil Produced
United States 90 92 91 94
Norway 74 72 79 69
United Kingdom 5 5 5 6
Africa 22 23 23 24
Other areas 5 8 5 8
- -----------------------------------------------------------------
196 200 203 201
=================================================================
Natural Gas Liquids Produced
United States 6 5 6 6
Norway 6 8 7 7
Other areas 1 - - 1
- -----------------------------------------------------------------
13 13 13 14
=================================================================
Millions of Cubic Feet Daily
-------------------------------------
Natural Gas Produced
United States (less gas
equivalent of liquids
shown above) 1,013 887 1,031 965
Norway* 245 224 254 270
United Kingdom* 25 14 56 44
Other areas 41 52 47 57
- -----------------------------------------------------------------
1,324 1,177 1,388 1,336
=================================================================
*Dry basis.
Liquefied Natural Gas
Sales 127 113 113 105
- -----------------------------------------------------------------
15
<PAGE>
U.S. E&P Millions of Dollars
- -------- -------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Reported net income $ 64 30 191 211
Less special items (3) - 6 4
- -----------------------------------------------------------------
Operating income $ 67 30 185 207
=================================================================
The increase in operating income for the third quarter of 1994,
compared with the same quarter in 1993, was due to a number of
items, including higher natural gas sales volumes, lower
exploration expenses, lower depreciation, depletion and
amortization (DD&A), higher crude oil revenues, and higher
liquefied natural gas revenues. These items were partly offset
by 19 percent lower natural gas prices. Exploration expenses
were down in 1994 due to lower dry hole charges. In the third
quarter of 1993, the company incurred significant dry hole
expenses in Alaska. The lower DD&A was a result of property
dispositions, higher costs in 1993 related to Hurricane Andrew,
and adjustments in future dismantlement liability estimates.
Crude oil revenues were higher primarily due to higher prices, as
the average sales price per barrel of crude oil increased
9 percent compared with a year ago. However, prices fell
steadily during the third quarter after peaking in July. The
higher liquefied natural gas revenues were due primarily to
higher sales volumes from the increased capacity of the new
liquefied natural gas tankers.
For the nine-month period ended September 30, 1994, results were
down 11 percent from the same period in 1993. The decline was
due to lower crude oil revenues, partially offset by lower DD&A.
Though crude oil prices have trended upward during the first
three quarters of 1994, on a year-to-date average basis, they
remained 11 percent lower than a year ago. DD&A was lower in the
first nine months of 1994, compared with the same period last
year, due to property dispositions, higher costs in 1993 related
to Hurricane Andrew, and adjustments in future dismantlement
liability estimates. Dry hole charges were down slightly for the
nine months, as dry hole costs in Alaska during 1993 were higher
than dry hole charges in the Gulf of Mexico during 1994.
Operating income for both the three- and nine-month periods in
1994 benefited relatively more from domestic tax credits for
producing fuel from nonconventional sources.
U.S. crude oil production was down only slightly for both the
quarter and nine months from last year's levels. U.S. natural
gas production was up 14 percent for the quarter and 7 percent
for the nine months, primarily due to higher production from the
San Juan Basin, made possible by increased pipeline tie-ins and
new wells in the area. In addition, net gas production was up at
the South Marsh Island field, Gulf of Mexico.
16
<PAGE>
Special items in the third quarter of 1994 consisted of work
force reduction charges. In addition, the nine-month period
ended September 30, 1994, included favorable settlements related
to the company's Alaska operations and a net profits interest,
partially offset by a contingency accrual. Special items in the
first nine months of 1993 consisted primarily of a favorable
property tax settlement related to the company's minerals
operations.
Foreign E&P Millions of Dollars
- ----------- -------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Reported net income $10 24 44 101
Less special items (9) 8 (8) 24
- -----------------------------------------------------------------
Operating income $19 16 52 77
=================================================================
Operating income increased slightly in the third quarter of 1994,
compared with the same period a year ago. Lower exploration
expenses, coupled with lower operating and other costs, were
mostly offset by lower crude oil revenues.
For the first nine months of 1994, operating income was down
32 percent, primarily reflecting lower crude oil revenues due to
lower prices. As with U.S. crude oil prices, average foreign
crude oil sales prices have trended upward during the first three
quarters of 1994, but, on a year-to-date average basis, are still
down over $2 per barrel from the same period last year.
When compared with the same 1993 periods, foreign crude oil
production was down slightly in the third quarter of 1994 but up
5 percent in the first nine months, due primarily to increased
production from Norway's Ekofisk area.
For the third quarter of 1994, foreign natural gas production was
7 percent higher than last year's third quarter. New production
from the Ann field in the U.K. sector of the North Sea, coupled
with increased production from Norway, was partially offset by
loss of production from asset dispositions. For the nine-month
period, foreign natural gas production was down 4 percent
compared with last year, due to lower buyer demand in Norway and
the loss of production due to asset dispositions. These factors
were partially offset by new gas production from the Ann field.
Special items in both the third quarter and nine-month period in
1994 consisted primarily of a Norway income tax related item.
Special items in the third quarter of 1993 were primarily related
to a United Kingdom tax item. In addition, special items for the
nine-month period in 1993 consisted of after-tax asset sale gains
of $20 million, partly offset by foreign currency losses.
17
<PAGE>
GPM Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Reported net income $(2) 10 - 39
Less special item (3) - (3) -
Less preferred dividend
requirements of Phillips
Gas Company (8) (8) (24) (24)
- -----------------------------------------------------------------
Operating income $ 9 18 27 63
=================================================================
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 Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Sales Prices
U.S. residue gas (per
thousand cubic feet) $ 1.66 2.04 1.87 2.01
U.S. natural gas liquids
(per barrel--
unfractionated) 10.10 10.57 9.49 11.38
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Millions of Cubic Feet Daily
-------------------------------------
Operating Statistics
Natural Gas Purchases
Outside Phillips 1,181 1,091 1,154 1,051
Phillips 214 211 208 206
- -----------------------------------------------------------------
1,395 1,302 1,362 1,257
=================================================================
Raw Gas Throughput 1,506 1,470 1,498 1,412
- -----------------------------------------------------------------
Residue Gas Sales
Outside Phillips 853 806 856 767
Phillips 83 78 85 87
- -----------------------------------------------------------------
936 884 941 854
=================================================================
Thousands of Barrels Daily
-------------------------------------
Natural Gas Liquids
Production
From leasehold gas 22 22 22 22
From purchased gas 132 127 129 122
- -----------------------------------------------------------------
154 149 151 144
=================================================================
18
<PAGE>
NGL prices continued their slow recovery in the third quarter of
1994, but were still lower on average than the third quarter a
year ago. NGL prices increased during the quarter due in part to
increased seasonal demand for gasoline blending stocks, along
with increased demand for butanes used in the production of
methyl tertiary-butyl ether (MTBE), which will be necessary to
meet reformulated gasoline requirements effective January 1,
1995. Average residue gas prices for the quarter dropped
9 percent from the second quarter of 1994, and were 19 percent
lower than the third quarter last year. Average residue gas
prices for the quarter were under $1.70 per thousand cubic feet
for the first time since the third quarter of 1992. Softening
demand and increasing supplies were primarily responsible for the
sharp drop in prices from a year ago. As a result, GPM's
operating income for the quarter dropped substantially compared
with the corresponding quarter in 1993. Higher operating costs
also contributed to GPM's lower operating income. The increase
was mainly due to gathering fees the company began paying to GPM
Gas Gathering L.L.C. (GGG), effective January 1, 1994. The
company's operating costs also increased due to costs associated
with newly acquired plants and systems, and expansions of
existing systems.
For the first nine months of 1994, operating income was down
sharply, when compared with the corresponding period in 1993.
Lower NGL and residue gas sales prices, along with higher
operating costs were partially offset by higher residue gas and
NGL sales 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.
The special item in the third quarter and nine-month period of
1994 was a work force reduction charge.
19
<PAGE>
RM&T Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Reported net income $ 57 21 125 82
Less special items (2) (20) (2) (15)
- -----------------------------------------------------------------
Operating income $ 59 41 127 97
=================================================================
Sales prices and operating statistics for RM&T:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Sales Prices (per gallon)
Automotive gasoline $.62 .58 .57 .61
Distillates .52 .53 .51 .56
Propane .35 .37 .35 .40
Operating Statistics
Refinery crude oil
capacity utilization 110% 97 104 99
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Thousands of Barrels Daily
-------------------------------------
Operating Statistics
Refinery Operations
Crude Oil Refined 337 296 318 302
- -----------------------------------------------------------------
Petroleum Products Outside
Sales*
United States
Automotive gasoline 317 286 288 281
Aviation fuels 32 30 32 32
Distillates 141 114 131 103
Propane 18 18 22 23
Other products 20 19 19 18
- -----------------------------------------------------------------
528 467 492 457
Foreign 50 50 54 52
- -----------------------------------------------------------------
578 517 546 509
=================================================================
*Amounts for 1993 have been restated to reflect that certain
operations previously a part of RM&T are now included in
Chemicals.
Third quarter 1994 operating income for the company's RM&T
segment was $59 million, a 44 percent increase from 1993's third
quarter operating income of $41 million. For the second
consecutive quarter, the company's refineries operating
performance was strong, with a crude oil capacity utilization
20
<PAGE>
rate of 110 percent. This contributed to higher gasoline and
distillate sales volumes. In addition, earnings also benefited
from higher gasoline margins. These higher margins resulted in
part from the company's ability, due to an advantageous
transportation position, to deliver gasoline in the Midwest at a
time when several Midwestern refineries were experiencing
turnarounds or operating disruptions. In addition, gasoline
margins in the quarter benefited as sales prices did not drop as
rapidly as feedstock costs in the latter half of the quarter.
Operating income was up 31 percent for the first nine months of
1994, compared with the same period last year. The increase in
operating income was primarily attributable to higher automotive
gasoline and distillate margins relative to a year ago, coupled
with higher distillate sales volumes. Also benefiting results
was continued operating consistency by the company's refineries.
Since the beginning of the year, the company's three refineries
have operated at a crude oil capacity utilization rate of
104 percent, the highest sustained utilization rate in the last
10 years.
Special items in the third quarter and for the nine months of
1994 consisted of a work force reduction charge. Special items
in the third quarter of 1993 included an after-tax charge of
$20 million for the writedown of an incinerator project. For the
first nine months of 1993, in addition to the incinerator
writedown, special items included a favorable $8 million
after-tax business interruption insurance settlement.
Chemicals Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Reported net income $63 40 182 59
Less special items (3) 5 24 (5)
- -----------------------------------------------------------------
Operating income $66 35 158 64
=================================================================
Operating statistics for Chemicals:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Millions of Pounds
-------------------------------------
Operating Statistics
Selected Outside Sales
Ethylene* 293 253 871 793
Polyethylene - U.S. 345 273 1,003 801
Propylene 185 95 394 343
*Includes amounts equal to Phillips' 50 percent interest in the
Sweeny Olefins Limited Partnership (SOLP), after exclusion of
amounts sold by SOLP to Phillips.
21
<PAGE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Thousands of Barrels Daily
-------------------------------------
Selected Outside Sales
Automotive gasoline
(Puerto Rico Core) 22 26 22 26
Liquefied petroleum gas 90 89 86 83
Ethanes and pentanes 40 40 40 45
Natural Gas Liquids
Processed 212 204 202 200
Results for the third quarter of 1994 were much improved over the
corresponding period last year for the company's Chemicals
segment. Strong demand for olefins allowed for increased sales
volumes and the highest average ethylene margins for a quarter
since the first quarter of 1991. Ethylene inventories remain at
low levels industry wide, and demand remains high. A stronger
economy and industry production disruptions have been the driving
forces behind the high demand for the company's ethylene.
Ethylene is used as a feedstock to make plastic for a wide
variety of applications that are affected by consumer buying
habits. In a stronger economy, consumers buy more of these
goods, resulting in increased demand for ethylene. Higher
cyclohexane sales volumes also contributed to higher operating
income.
In the company's plastics operations, demand remained strong for
polyethylene, which resulted in higher sales volumes. However,
climbing ethylene feedstock costs continued to pressure
polyethylene margins, which were lower than the same quarter a
year ago.
Operating income was up sharply for the first nine months of
1994, compared with the same period in 1993. Earnings improved
due to higher margins for olefins and aromatics and higher
olefin, cyclohexane and plastics sales volumes. In addition,
operating income benefited $18 million from the sale of a
polypropylene license.
Special items for the third quarter of 1994 included a work force
reduction charge. In addition, the first nine months of 1994
included an after-tax gain of $20 million from a subsidiary stock
transaction, along with a favorable adjustment to a 1993 pipeline
abandonment accrual. Special items in the third quarter of 1993
consisted of a favorable settlement of a licensing dispute. The
first nine months of 1993 also included an accrual for the
abandonment of a pipeline.
22
<PAGE>
Corporate and Other Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
Reported Corporate and
Other $(73) (84) (220) (267)
Less special items (2) (8) (5) (33)
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(71) (76) (215) (234)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(27) (33) (88) (110)
Net interest (45) (44) (139) (135)
Other 1 1 12 11
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(71) (76) (215) (234)
=================================================================
Relative to the corresponding periods last year, corporate
general and administrative expenses were down $6 million and
$22 million for the third quarter and nine months, respectively.
The decline in expenses was due in part to lower costs retained
at Corporate associated with the company's incentive compensation
plans. Also contributing to the decline were lower advertising
and computing expenses, along with lower expenses for outside
legal counsel.
Net interest consists of interest income and expense, net of
capitalized interest. Net interest for the third quarter of 1994
changed only slightly from the same period a year ago. For the
nine-month period, net interest was up 3 percent, mainly due to
higher interest on debt.
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. Compared with the
corresponding periods in 1993, Other earnings changed only
slightly in 1994.
Special items in the third quarter of 1994 included after-tax
work force reduction charges of $13 million and a contingency
accrual, partially offset by the interest applicable to various
favorable settlements of claims. In addition, the nine-month
period included losses from asset sales and additional work force
reduction charges. For the third quarter of 1993, special items
consisted of the effect of the change in the corporate U.S. tax
rate from 34 percent to 35 percent. The nine-month period in
1993 also included an after-tax accrual for pending claims of
$13 million and an after-tax work force reduction charge of
$26 million, partly offset by tax related settlements and
contingencies.
23
<PAGE>
Income Statement Analysis
Revenues
Total revenues for the third quarter of 1994 were $3.3 billion,
compared with $3.2 billion for the third quarter of 1993. Sales
and other operating revenues were up 5 percent due to higher
petroleum products revenues, partly offset by loss of revenues
due to asset sales. Petroleum product revenues were up because
of higher sales volumes and prices.
For the nine-month period ended September 30, 1994, total
revenues were $9.3 billion, compared with $9.6 billion for the
corresponding period in 1993. Sales and other operating revenues
were down 2 percent due to lower crude oil revenues and loss of
revenues due to asset sales, partly offset by higher plastics
revenues.
Total Costs and Expenses
Total costs and expenses were up slightly for the quarter but
down 4 percent for the first nine months of 1994, compared with
the same periods last year.
Purchase costs increased 7 percent for the quarter, due primarily
to higher petroleum product purchases and crude oil feedstock
costs, partly offset by the impact of asset sales. For the
nine-month period, purchase costs were slightly lower than a year
ago, as lower crude oil feedstock costs and the effect of asset
sales was mostly offset by higher petroleum product purchases.
Production and operating expenses were lower in both the third
quarter and first nine months of 1994, compared with the
corresponding periods in 1993. The change resulted primarily
from effects of asset sales and a charge for the writedown of an
incinerator in the third quarter of 1993, partly offset by higher
operating costs in 1994 associated with GPM's expansion strategy.
Exploration expenses were lower in the quarter, due primarily to
dry hole charges recorded in the third quarter of 1993 related to
the company's exploratory efforts in Alaska. Exploration
expenses changed only slightly for the first nine months of 1994,
compared with 1993.
Selling, general and administrative expenses (SG&A) in the third
quarter were higher than last year's third quarter due to work
force reduction charges. For the first nine months, asset sales,
lower work force reduction charges, a contingency accrual
recorded in 1993, and the company's cost reduction efforts led to
a 16 percent decline in SG&A.
24
<PAGE>
Depreciation, depletion, amortization and retirements (DD&A)
declined 8 percent for the quarter. Property dispositions,
higher costs in 1993 as a result of Hurricane Andrew and an
incinerator writedown, and adjustments in future dismantlement
liability estimates in 1994, were partly offset by higher DD&A
from the company's Norway operations due to the start-up of the
Embla field. For the nine-month period, DD&A declined slightly.
Taxes other than income taxes were about the same for the third
quarter this year compared with last year's third quarter. For
the first nine months, taxes other than income taxes declined due
to a favorable settlement related to production taxes in 1994,
along with general production tax decreases due in part to lower
production associated with the company's interest in the Prudhoe
Bay field.
Interest and expense on indebtedness was down substantially for
the quarter, compared with the third quarter a year ago, due
primarily to interest attributable to favorable claims and
settlements in 1994. Interest and expense on indebtedness for
the nine-month period was down to a lesser extent, due to
reversals in the 1993 period of contingency related interest
accruals.
Income Taxes
The company's effective tax rate for the third quarter of 1994
was 49 percent, compared with 66 percent for the third quarter of
1993. The company's effective tax rate for the nine months ended
September 30, 1994 was 48 percent, compared with 57 percent for
the same period in 1993. The lower 1994 effective tax rates
reflect a higher proportion of domestic income to foreign income.
Domestic income is taxed at relatively lower rates than foreign
income. Effective tax rates for the three- and nine-month
periods ended September 30, 1994 and 1993, benefited from
domestic tax credits for producing fuel from nonconventional
sources. Without these tax credits, the effective tax rates for
the three-month periods ended September 30, 1994 and 1993, would
have been 54 percent and 73 percent, respectively, and the rates
for the nine-month periods would have been 54 percent and
63 percent, respectively.
25
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
---------------------------------------
At At At
September 30 December 31 September 30
1994 1993 1993
---------------------------------------
Current ratio 1.0 1.0 1.0
Long-term debt $3,213 3,208 3,477
Preferred stock of
subsidiary $ 345 345 345
Stockholders' equity $2,854 2,688 2,739
Percent of long-term debt
to capital* 50% 51 53
Percent of floating-rate
debt to total debt 25% 25 38
*Capital includes long-term debt, preferred stock of subsidiary
and stockholders' equity.
Net income during the first nine months of 1994 was 44 percent
higher than net income for the same period in 1993. However,
during the same period cash provided by operating activities was
19 percent lower. The following events which occurred during the
first nine 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; $52 million in payments for previously recorded
contingencies; $39 million in pension contributions; and a $79
million tax payment for a previously recorded accrual still under
dispute. Increases in accounts and notes receivable resulting
from higher sales prices and volumes in the company's Chemicals
segment also reduced the cash provided by operating activities
for the first nine months of 1994 compared with the same period
in 1993. Even though cash provided by operating activities
during the first nine months of 1994 was lower than the same
period in 1993, cash and cash equivalents increased $25 million
during the first nine months of the year.
At September 30, 1994, the company's committed credit facilities
with major banks totaled $1.1 billion, of which approximately
$920 million was available to be drawn. In addition, the company
has a $250 million committed letter-of-credit-supported
commercial paper program under which $127 million had been issued
as of September 30, 1994.
During September, the company's LTSSP signed an agreement
amending its second term loan under which $397 million is
outstanding. The amended term loan requires repayment in annual
installments beginning in 1999 and has the same maturity as the
original term loan agreement entered into in 1990, but provides a
lower rate of interest. The company continues to guarantee
payment of the LTSSP debt.
26
<PAGE>
On September 27, 1994, Phillips completed 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 resulting in a cash inflow of $111 million.
The company's wholly owned subsidiary, Phillips Petroleum Company
Norway, has received a commitment from a group of international
banks for a $500 million revolving credit facility, which will
replace an existing $300 million bank credit facility that was
due to expire in 1995. The new credit facility is expected to be
in place by mid-November.
Phillips is currently negotiating the sale of a variable interest
in the net proceeds from production of certain coal-seam gas
properties. The transaction could produce cash inflows of up to
$250 million. Completion of the sale is anticipated late in the
fourth quarter of this year.
As part of the company's ongoing efforts to contain costs,
process improvements are currently being implemented. In
conjunction with this cost reduction process, in September the
company announced a staffing reduction of approximately 800
employees would take place by the end of 1994. This resulted in
a before-tax charge of $34 million in the third quarter.
Payments began in the third quarter and will continue through the
first half of 1995. Since process improvement is continuous,
additional accruals may be necessary as further plans are
identified and implemented.
Phillips has hedging programs in place that utilize commodity
derived forward, future, swap and option contracts to limit the
risks related to Phillips' physical exposure to crude oil,
natural gas and product price changes. The changes in the value
of these contracts are reported as an adjustment to the carrying
value of the hedged item. The activity levels of these programs
have been limited and the earnings impact and any unrecognized
gains and losses have not been material in the first nine months
of 1994.
27
<PAGE>
Capital Spending
Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
------------------ -----------------
E&P $128 163 486 502
GPM 21 25 65 53
RM&T 28 16 62 57
Chemicals 20 33 64 134
Corporate and Other 7 6 16 14
- -----------------------------------------------------------------
$204 243 693 760
=================================================================
United States $128 170 442 557
Foreign 76 73 251 203
- -----------------------------------------------------------------
$204 243 693 760
=================================================================
On August 1, 1994, Phillips contributed its polypropylene assets
with a net book value of $107 million to Phillips Sumika
Polypropylene Company (PSPC), a partnership formed in 1992
between Phillips and Sumika Polymers America Corporation
(Sumika). Phillips and Sumika jointly control PSPC, and Phillips
accounts for its investment using the equity method of
accounting. No financial gain or loss was recognized on the
contribution. Sumika will fund the construction of a new PSPC
polypropylene facility in Pasadena, Texas. Construction is
scheduled to begin during the fourth quarter of 1994 and be
completed in the first half of 1996. The new facility will
utilize Sumitomo Chemical Company's (Sumika's parent company)
proprietary gas phase process and be capable of producing
approximately 270 million pounds of polypropylene a year,
bringing the partnership's total production capability to
750 million pounds annually. Sharing of net cash flows, and
gains and losses each period is dependent on the relative
contributions of both partners. The company's share of net
income and cash flows from the partnership will decrease as
Sumika funds construction of the new facility, but the company's
share will not fall below 50 percent. Revenues and cash flows
generated by these transferred assets through July 31, 1994, are
consolidated into the company's financial statements.
Phillips and its co-venturer were awarded leases on nine
undeveloped blocks containing subsalt prospects 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.
A tentative agreement between Phillips Petroleum Company Norway,
as operator for 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
28
<PAGE>
in March of this year, the plan projects significantly reduced
operating costs and will allow the maximum long-term recovery of
Ekofisk field reserves.
In addition to extending the PNG's production license for the
Ekofisk fields from its current expiration in 2011 to the year
2028, the agreement also provides for:
o elimination of the royalty charged on oil and natural gas
liquids production as of the completion of the project
o the Norwegian state's funding 5 percent of the Ekofisk
redevelopment expenditures in exchange for a 5 percent
direct interest in the production license beginning
January 1, 1999
o Phillips' having a 35 percent interest in the project
o extension of the oil pipeline license currently held by
Norpipe a.s from the year 2005 to 2028, subject to a
40 percent Norwegian state ownership in the oil pipeline
commencing in 2005
o extension of the gas pipeline license currently held by
Norpipe a.s. from the year 2007 to the year 2028, subject to
a 40 percent Norwegian state ownership in the oil pipeline
commencing in 2007
o PNG's and Statoil's ownership of the pipelines to be reduced
from 50 percent each to 30 percent each to accommodate the
40 percent Norwegian state interest
On November 9, 1994, the Norwegian parliament approved the
Ekofisk redevelopment plan in accordance with the commercial
terms of the preliminary agreement. 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' 35 percent share of
the cost being approximately $1.0 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 will generate cash flows equal to 93 percent of such
costs over a period of six years, commencing in the year in which
the relevant capital expenditures are made. Phillips Petroleum
Company Norway's new $500 million bank credit facility will be
available to assist in funding capital expenditures for the
redevelopment.
29
<PAGE>
Contingencies
Legal and Tax Matters
The Internal Revenue Service has appealed the U.S. Tax Court's
rulings related to the company's sales of liquefied natural gas
to two utility companies in Japan. The Tax Court's rulings
supported the company's position that more than 50 percent of the
income at issue was from a foreign source. Though a final,
favorable settlement of this issue would have a material,
positive effect on Phillips' net income and cash position, it
remains too early to determine the outcome, when the issues will
be resolved, or the final financial effect.
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 35 remaining claimants seek compensatory and
punitive damages, primarily for psychological injury. Provision
has been made for the estimated probable cost of these claims.
Phillips accrues for contingencies when a loss is probable and
the amounts can be reasonably estimated. Based on currently
available information, the company believes that it is remote
that future costs related to known contingent liability exposures
will exceed current accruals by an amount that would have a
material adverse impact on the company's financial statements.
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 may require
investigatory or remedial work to adequately protect the
environment or address new regulatory requirements.
30
<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, nine of these
sites have been resolved through consent decrees, deposits into
trust funds or otherwise. Two sites were also added during the
nine-month period. Of the sites remaining at September 30, 1994,
the company believes it has a legal defense or its records
indicate no involvement for 10 sites. At 11 other sites, present
information indicates that it is probable that the company's
exposure is less than $100,000 per site. At 19 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.
At September 30, 1994, accruals of $13 million had been made for
the company's PRP sites. In addition, the company has accrued
$92 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 $111 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. Actual
cleanup costs generally occur after the PRPs obtain EPA or
equivalent state agency approval.
After an investigation and assessment of environmental exposures
for cleanup and other costs, the company makes accruals on an
undiscounted basis for planned remediation activities for sites
where it is probable that future costs will be incurred and these
costs can be reasonably estimated. These accruals have not been
reduced for possible insurance recoveries. Based on currently
available information, the company believes that it is remote
that future costs related to known contingent liability exposures
will exceed current accruals by an amount that would have a
material adverse impact on the company's financial statements.
31
<PAGE>
OUTLOOK
Effective December 28, 1994, regulations under the Oil Pollution
Act of 1990 (OPA 90) will require that all vessel owners carrying
certain substances, including crude oil, have on board a
certificate of financial responsibility (COFR) issued by the U.S.
Coast Guard. The COFR will serve as evidence of financial
responsibility for all pollution damages within limits set by the
applicable law and regulation. Without such a certificate the
vessel will not be permitted to enter U. S. waters. At present
it is uncertain whether vessel owners will be able or willing to
meet the financial responsibility tests required or procure
acceptable forms of insurance, guaranties, or bonds to receive
the required COFR.
The company currently relies on water borne foreign crude oil as
feedstock for a significant portion of its U.S. refining
capacity. This oil is transported by vessels owned by third
parties and chartered by the company. A reduction in the number
of vessel owners approved by the U.S. Coast Guard to transport
crude oil in U.S. waters, as a result of their inability to
obtain COFRs, could constrain availability of foreign crude oil
in the United States generally and adversely affect the company's
operations. The company and others have efforts under way to
address compliance with the OPA 90 regulations, but the outcome
of such efforts is presently unsettled.
On October 20, 1994, during flooding of the San Jacinto River
near Houston, Texas, Colonial Pipeline Company's (Colonial) two
major petroleum products pipelines, which Phillips uses, ruptured
and caught fire. Phillips owns a 7 percent interest in Colonial
and ships gasoline, diesel fuel and other products through the
two pipelines to customers in the southeast United States. The
two pipelines reopened east of the San Jacinto River during the
latter part of the same week. Temporary repairs enabled one of
the lines to completely reopen on November 2, 1994, and Colonial
has stated that using this line at maximum capacity will enable
it to resume normal deliveries. Permanent repairs to both lines
could take several months.
Within Phillips, the company's refinery at Sweeny, Texas, was
most impacted by the accident. With Colonial capacity severed,
the Sweeny refinery temporarily cut back production. By
utilizing alternate delivery arrangements (e.g., barging and
exchange agreements), the refinery was returned to its pre-flood
production level of 208,000 barrels a day in less than a week.
Between Colonial resuming full product shipments and the current
balance of supply and demand increasing margins for those
refineries that can deliver their product to the market, the
financial impact on the company is expected to be negligible.
32
<PAGE>
The Colonial break is not affecting the company's ability to meet
the Clean Air Act's January 1, 1995, deadline for supplying
reformulated gasoline to nine of the nation's most polluted
cities. Phillips sells gasoline in only three targeted areas
(Chicago, Houston and Milwaukee), as well as Dallas, which
voluntarily adopted the requirement. Additionally, the company
does not anticipate any other problems in meeting this deadline.
During the third quarter of 1994, the company's co-venturer in
the Sunfish prospect in the Cook Inlet of Alaska announced that
its analysis of well and seismic data indicated that the prospect
was not commercial on a stand-alone basis. The co-venturer also
announced that it would not conduct further exploration
activities on the prospect and would take a charge against
earnings in the third quarter related to the Sunfish 1, North
Foreland 1 and Sunfish 3 wells.
Phillips continues to assess the reserves potential, development
costs, and commercial potential of the Sunfish prospect assuming
development would occur from the existing Tyonek gas production
platform which is 100 percent owned by the company. The
economics of utilizing an existing platform are different from
those involving a new stand-alone facility. At least one
additional exploration well is considered necessary to confirm
the reserves before a decision can be made on whether or not to
proceed with commercial development. Discussions are under way
with the co-venturer concerning its future intentions with
respect to Sunfish, including possible joint exploration and
production activity from the Tyonek platform, or alternatively,
the acquisition of its lease position by Phillips. Although the
next exploration well is presently included in the company's
capital budget, the reserves and commercial assessment needs to
be completed and the discussions with the co-venturer need to be
resolved before additional exploration drilling can proceed. The
company has demobilized the drilling rig originally located on
the Tyonek platform used to drill the Sunfish 2 and 3 wells and
conduct workovers related to the existing gas production. The
company will procure more suitable drilling equipment for any
additional exploration work. At September 30, 1994, the company
had approximately $51 million of investment in the three wells
identified above.
The first development well in China has been completed, with
first production anticipated in the second half of November.
Drilling operations are under way on the second development well.
Commissioning is complete on the Xijiang 24-3 platform, and the
floating production storage vessel is scheduled to be ready to
receive oil in late November. As a result of the commencement of
production in China, the company will be able to reverse
approximately $14 million of the valuation allowance against the
related net operating loss deferred tax asset in the fourth
quarter of 1994.
33
<PAGE>
When the new Ekofisk operating facilities begin production,
currently estimated to be in late 1998, increases in
depreciation, depletion and amortization expense will occur, but
operating expenses should decrease.
Certain financing transactions expected to be finalized in the
fourth quarter of 1994 will result in the realization of capital
gains for tax purposes. This will expedite the utilization of
capital loss carryforwards, allowing the company to reverse
approximately $50 million of the deferred tax asset valuation
allowance.
In October 1994, a $14 million deferred tax asset related to the
company's aromatics production facilities in Puerto Rico was
recognized as a result of anticipated increased paraxylene
production to be realized from the new Aromax catalyst reforming
technology. Originally scheduled to go on-line during the fourth
quarter of 1994, implementation of the new technology has slipped
into the first quarter of 1995, due in part to a non-injury
construction accident which occurred in October of this year.
To meet its liquidity requirements, including funding its capital
program, the company will look primarily to cash generated from
operations and financing.
34
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
Reports on Form 8-K
- -------------------
During the three months ended September 30, 1994, the company has
not filed any reports on Form 8-K.
35
<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)
November 11, 1994
36
<PAGE>
Exhibit 12
PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES
TOTAL ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars
------------------------------
Nine Months Ended September 30
1994 1993
------------------------------
(Unaudited)
Earnings Available for Fixed Charges:
Income before income taxes and subsidiary
stock transaction $603 529
Equity in undistributed earnings of
less-than-fifty-percent-owned companies (2) 5
Fixed charges, excluding capitalized
interest and the portion of the
preferred dividend requirements of a
subsidiary not deducted from pretax
income* 249 272
------------------------------
$850 806
==============================
Fixed Charges:
Interest and expense on indebtedness,
excluding capitalized interest $199 213
Capitalized interest 10 6
Preferred dividend requirements of
a subsidiary 48 55
One-third of rental expense, net of
subleasing income, for operating leases 19 26
------------------------------
$276 300
==============================
Ratio of Earnings to Fixed Charges 3.08 2.69
- --------------------
*Includes amortization of capitalized interest totaling approximately
$7 million in 1994 and $9 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF PHILLIPS PETROLEUM COMPANY AS OF SEPTEMBER 30,
1994, AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000078214
<NAME> PHILLIPS PETROLEUM COMPANY
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 144
<SECURITIES> 0
<RECEIVABLES> 1,377
<ALLOWANCES> 15
<INVENTORY> 541
<CURRENT-ASSETS> 2,298
<PP&E> 18,239
<DEPRECIATION> 10,387
<TOTAL-ASSETS> 11,042
<CURRENT-LIABILITIES> 2,281
<BONDS> 3,213
<COMMON> 469
0
0
<OTHER-SE> 2,385
<TOTAL-LIABILITY-AND-EQUITY> 11,042
<SALES> 9,194
<TOTAL-REVENUES> 9,299
<CGS> 7,918<F1>
<TOTAL-COSTS> 8,485<F2>
<OTHER-EXPENSES> 4<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187
<INCOME-PRETAX> 623
<INCOME-TAX> 301
<INCOME-CONTINUING> 322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 322
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
<FN>
<F1>Purchased crude oil and products + Production and operating expenses +
Exploration expenses + Depreciation, depletion, amortization and retirements
<F2>CGS + Selling, general and administrative expenses + Taxes other than income
taxes
<F3>Preferred dividend requirements of subsidiary + Gain on subsidiary stock
transaction
</FN>
</TABLE>
