SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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OR
[ ] 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 had 263,158,542 shares of common stock, $1.25 par value,
outstanding at July 31, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
---------------------------------
Three Months Six Months
Ended Ended
June 30 June 30
---------------------------------
1996 1995 1996 1995
---------------------------------
Revenues
Sales and other operating revenues $3,937 3,591 7,532 6,678
Equity in earnings of affiliated
companies 22 39 20 68
Other revenues 16 6 25 14
- ---------------------------------------------------------------------
Total Revenues 3,975 3,636 7,577 6,760
- ---------------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 2,536 2,238 4,742 4,066
Production and operating expenses 492 563 1,012 1,062
Exploration expenses 47 46 113 89
Selling, general and
administrative expenses 135 107 261 221
Depreciation, depletion and
amortization 187 281 428 492
Taxes other than income taxes 66 69 132 139
Interest expense 59 68 118 136
Preferred dividend requirements
of subsidiary and capital trust 10 8 18 16
- ---------------------------------------------------------------------
Total Costs and Expenses 3,532 3,380 6,824 6,221
- ---------------------------------------------------------------------
Income before income taxes and
interest effects of Kenai LNG
tax settlement 443 256 753 539
Interest effects of Kenai LNG
tax settlement - - 571 -
- ---------------------------------------------------------------------
Income before income taxes 443 256 1,324 539
Provision for income taxes 222 143 408 315
- ---------------------------------------------------------------------
Net Income 221 113 916 224
=====================================================================
Per Share of Common Stock
Net Income $ .84 .42 3.49 .85
Dividends Paid $ .305 .305 .610 .585
- ---------------------------------------------------------------------
Average Common Shares Outstanding
(in thousands) 262,949 262,028 262,629 261,852
- ---------------------------------------------------------------------
See Notes to Financial Statements.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-----------------------
June 30 December 31
1996 1995
-----------------------
Assets
Cash and cash equivalents $ 223 67
Accounts and notes receivable (less
allowances: 1996--$20; 1995--$15) 1,817 1,522
Inventories 523 505
Deferred income taxes 119 229
Prepaid expenses and other current assets 73 86
- -----------------------------------------------------------------
Total Current Assets 2,755 2,409
Investments and long-term receivables 1,057 841
Properties, plants and equipment (net) 8,726 8,493
Deferred income taxes 100 121
Deferred charges 128 114
- -----------------------------------------------------------------
Total $12,766 11,978
=================================================================
Liabilities
Accounts payable $ 1,521 1,494
Long-term debt due within one year 29 19
Dividends payable 2 -
Accrued income and other taxes 512 922
Other accruals 288 380
- -----------------------------------------------------------------
Total Current Liabilities 2,352 2,815
Long-term debt 2,954 3,097
Accrued dismantlement, removal and
environmental costs 695 657
Deferred income taxes 966 948
Employee benefit obligations 440 400
Other liabilities and deferred credits 727 522
- -----------------------------------------------------------------
Total Liabilities 8,134 8,439
- -----------------------------------------------------------------
Preferred Stock of Subsidiary and Other
Minority Interests 350 351
- -----------------------------------------------------------------
Company-Obligated Mandatorily
Redeemable Preferred Securities
of Phillips Capital Trust 300 -
- -----------------------------------------------------------------
Common Stockholders' Equity
Common stock--500,000,000 shares
authorized at $1.25 par value
Issued (306,380,511 shares)
Par value 383 383
Capital in excess of par 1,989 1,966
Treasury stock (at cost:
1996--14,069,837 shares;
1995--15,047,246 shares) (770) (827)
Compensation and Benefits Trust (CBT)
(at cost: 29,200,000 shares) (989) (989)
Foreign currency translation adjustments 29 39
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (396) (414)
Retained earnings 3,736 3,030
- -----------------------------------------------------------------
Total Stockholders' Equity 3,982 3,188
- -----------------------------------------------------------------
Total $12,766 11,978
=================================================================
See Notes to Financial Statements.
2
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Six Months Ended
June 30
-------------------
1996 1995
-------------------
Cash Flows from Operating Activities
Net income $ 916 224
Adjustments to reconcile net income to net
cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 428 492
Dry hole costs and leasehold
impairment 51 29
Deferred taxes 78 (24)
Kenai LNG tax settlement receivable (167) -
Other 56 25
Working capital adjustments
Increase (decrease) in aggregate
balance of accounts receivable sold (200) 40
Increase in other accounts and notes
receivable (101) (123)
Increase in inventories (19) (28)
Decrease in prepaid expenses and
other current assets 14 -
Increase (decrease) in accounts payable 15 (2)
Increase (decrease) in taxes and
other accruals (294) 120
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 777 753
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments,
including dry hole costs (707) (549)
Proceeds from asset dispositions 27 27
Long-term advances to affiliates and
other investments (44) (7)
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (724) (529)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 479 329
Repayment of debt (604) (446)
Issuance of company stock 18 6
Issuance of company-obligated mandatorily
redeemable preferred securities 300 -
Dividends paid (160) (153)
Other 70 (31)
- -----------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities 103 (295)
- -----------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents 156 (71)
Balance at beginning of period 67 193
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 223 122
=================================================================
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. Certain amounts in the 1995
financial statements have been reclassified to conform with the
1996 presentation.
Note 2--Accounting Change
Effective January 1, 1996, the company made certain changes in
the estimated useful lives of its major domestic downstream
facilities. This change increased second quarter and the first
six months of 1996 net income by $5 million, $.02 per share, and
$10 million, $.04 per share, respectively. Also, effective
January 1, 1996, the company changed its method of accounting for
the depreciation of its Gas Gathering, Processing and Marketing
segment's natural gas plants and systems from the unit-of-
production method to the straight-line method, using an estimated
life of 20 years for most of these assets. This change was made
to better reflect how the assets are expected to be used over
time, to provide a better matching of revenues and expenses, and
to be consistent with prevalent industry practice. As a result
of the change, net income for the three- and six-month periods
ended June 30, 1996, was $5 million and $8 million higher, or
$.02 and $.03 per share, respectively. The estimated cumulative
effect of the change was not material. The effect of these
changes was substantially offset by increased depreciation
expense as a result of asset acquisitions and capital additions.
4
<PAGE>
Note 3--Inventories
Inventories consisted of the following:
Millions of Dollars
-----------------------
June 30 December 31
1996 1995
-----------------------
Crude oil and petroleum products $193 173
Chemical products 253 245
Materials, supplies and other 77 87
- -----------------------------------------------------------------
$523 505
=================================================================
Note 4--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Millions of Dollars
-----------------------
June 30 December 31
1996 1995
-----------------------
Properties, plants and equipment
(at cost) $19,570 19,088
Less accumulated depreciation,
depletion and amortization 10,844 10,595
- -----------------------------------------------------------------
$ 8,726 8,493
=================================================================
Note 5--Impairment of Point Arguello Field
Due to declining production and an updated production forecast
for the Point Arguello field offshore California, an impairment
of $45 million after-tax was taken in the first quarter of 1996,
reducing the net book value to the estimated fair market value.
The fair market value of this Exploration and Production (E&P)
asset was determined using the present value of expected future
cash flows, resulting in a before-tax charge of $51 million to
depreciation, depletion and amortization expense, and a
$19 million reduction in equity in earnings of affiliated
companies.
Note 6--Debt
The company has a $1.1 billion revolving bank credit facility,
and a $250 million commercial paper program that is supported by
a portion of the company's revolving credit line equal to
100 percent of the commercial paper outstanding. No amounts were
outstanding under the revolving bank credit facility or the
commercial paper program at June 30, 1996.
5
<PAGE>
At June 30, 1996, Phillips Petroleum Company Norway, a wholly
owned subsidiary, had $100 million in borrowings outstanding
under a $500 million revolving credit facility.
Note 7--Kenai LNG Tax Settlement
On February 26, 1996, the U.S. Tax Court's previous decisions
related to the company's sales of liquefied natural gas (LNG)
from its Kenai, Alaska, facility to Japan, became final. The Tax
Court's decisions supported the company's position that more than
50 percent of the income for years 1975 through 1978 was from a
foreign source. The favorable resolution of this issue increased
net income for the six-month period ended June 30, 1996, by
$565 million.
Note 8--Income Taxes
The company's effective tax rates for the three- and six-month
periods ended June 30, 1996, were 50 and 31 percent,
respectively, compared with 56 and 58 percent for each of the
same periods a year ago. The decrease in the rate for the six-
month period was due mainly to the favorable resolution of the
Kenai LNG tax case, discussed in Note 7. Excluding the Kenai
settlement, the effective tax rate for the six-month period ended
June 30, 1996, would have been 53 percent, 5 percent lower than
1995. This decrease and the decrease for the three-month period
ending June 30, 1996, were due mainly to a greater ratio of
domestic to foreign earnings, which are generally taxed at a
lower rate, and the utilization of foreign tax credits against
current period Kenai LNG earnings.
Note 9--Contingencies
In the case of all known contingencies, the company accrues an
undiscounted liability when the loss is probable and the amount
is reasonably estimable. These liabilities are not reduced for
potential insurance recoveries. If applicable, undiscounted
receivables are accrued for probable 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 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
6
<PAGE>
liabilities recorded for environmental remediation, tax and legal
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 responsible parties.
Estimated future costs related to tax and legal matters are
subject to change as events evolve and as additional information
becomes available during the administrative and litigation
process.
Environmental--The company is subject to federal, state and local
environmental laws and regulations. These may result in
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.
Tax Contingencies--The company has a number of issues outstanding
with the IRS related to tax years 1979 through 1992 that can
proceed toward final settlement as a result of resolving the
Kenai LNG tax case. Although it is too early to determine the
final financial effects of resolving these years, a favorable
outcome would have a positive effect on net income and cash flow
while an unfavorable one would not impact the company's net
income or cash position. While total resolution may require a
number of years, the earliest years are expected to be resolved
in the near term.
Other Legal Proceedings--The company is a party to a number of
other legal 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.
Note 10--Company-Obligated Mandatorily Redeemable Preferred
Securities of Phillips Capital Trust
During February 1996, the company formed a new statutory business
trust, Phillips 66 Capital I (Trust), of which the company owns
all of the common stock. The Trust exists for the sole purpose
7
<PAGE>
of issuing trust securities and investing the proceeds thereof in
an equivalent amount of subordinated debt securities of Phillips
Petroleum Company.
On May 29, 1996, the Trust completed a $300 million underwritten
public offering of 12,000,000 shares of 8.24% Trust Originated
Preferred Securities (Preferred Securities). The sole asset of
the Trust is $309 million of Phillips' 8.24% Junior Subordinated
Deferrable Interest Securities due 2036 (Subordinated Debt
Securities), purchased by the Trust on May 29, 1996. The
Subordinated Debt Securities are unsecured obligations of
Phillips and subordinate and junior in right of payment to all
present and future senior indebtedness of Phillips. The
Subordinated Debt Securities and related income statement effects
are eliminated in the company's consolidated financial
statements. The Subordinated Debt Securities are due May 29,
2036, and are redeemable in whole, or in part, at the option of
Phillips, on or after May 29, 2001, at a redemption price of
$25 per share, plus accrued and unpaid interest. When the
company redeems the Subordinated Debt Securities, the Trust is
required to apply all redemption proceeds to the immediate
redemption of the Trust's Preferred Securities.
Phillips fully and unconditionally guarantees the Trust's
obligations under the Preferred Securities.
Note 11--Cash Flow Information
Cash payments and non-cash investing and financing activities for
the six-month periods ended June 30 were as follows:
Millions of Dollars
-------------------
1996 1995
-------------------
Cash payments
Interest
Debt $122 112
Taxes and other 7 7
- -----------------------------------------------------------------
$129 119
=================================================================
Income taxes $389 210
- -----------------------------------------------------------------
Non-Cash Financing Activities
Common stock awards issued under
incentive compensation plans $ 4 -
Issuance of promissory note to purchase
service stations 7 -
- -----------------------------------------------------------------
8
<PAGE>
- -----------------------------------------------------------------
Management's Discussion and Analysis Phillips Petroleum Company
RESULTS OF OPERATIONS
Unless otherwise noted, discussion of results for the three- and
six-month periods ending June 30, 1996, are based on a comparison
with the corresponding periods in 1995.
A summary of the company's net income, by business segment and
consolidated, follows:
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Exploration and Production
(E&P) 146 74 237 175
Gas Gathering, Processing
and Marketing (GPM) 29 5* 57 8*
Refining, Marketing and
Transportation (RM&T) 39 12 56 7
Chemicals 83 112 153 208
Corporate and Other (76) (90)* 413 (174)*
- -----------------------------------------------------------------
Net Income $221 113 916 224
=================================================================
*Preferred stock dividend requirements of subsidiary was
reclassified to Corporate and Other for segment reporting.
Consolidated Results
Earnings included the following special items on an after-tax
basis:
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Property impairments $ - (49) (45) (49)
Kenai LNG tax settlement - - 565 -
Net gains on asset sales 5 - 5 -
Work force reduction
charges - (8) (1) (13)
Foreign currency gains - - - 1
Pending claims and
settlements (1) - (29) -
Other items (4) (8) (10) (14)
- -----------------------------------------------------------------
Total special items $ - (65) 485 (75)
=================================================================
9
<PAGE>
Excluding the special items above, net operating income was
$221 million for the three-month period ended June 30, 1996,
compared with $178 million for the same period last year. For the
six-month period ended June 30, 1996, net operating income was
$431 million, compared with $299 million for the corresponding
six-month period a year ago. These improvements over last year's
results can be attributed to higher earnings from the company's
GPM and RM&T segments, both of which are benefiting from improved
margins and lower cost structures. In addition, higher crude oil
and natural gas prices increased earnings from the E&P segment.
In Chemicals, earnings were lower primarily as a result of lower
ethylene and polyethylene margins.
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
Phillips at a Glance 1996 1995 1996 1995
------------------ ----------------
U.S. crude oil
production (MBD) 69 80 71 82
Worldwide crude oil
production (MBD) 216 222 220 224
U.S. natural gas
production (MMCFD) 1,131 1,066 1,133 1,080
Worldwide natural gas
production (MMCFD) 1,535 1,479 1,571 1,527
Worldwide natural gas
liquids production (MBD) 165 158 160 159
Liquefied natural gas
sales (MMCFD) 114 98 122 114
Refinery utilization
rate (%) 92 97 91 95
U.S. automotive gasoline
sales (MBD) 336 334 335 323
U.S. distillates
sales(MBD) 136 137 135 134
Worldwide petroleum
products sales (MBD) 684 704 689 694
Natural gas liquids
processed (MBD) 208 189 202 203
Ethylene production
(MMlbs)* 618 625 1,313 1,259
Polyethylene
production (MMlbs)* 504 474 1,017 914
Polypropylene production
(MMlbs)* 53 114 142 219
Paraxylene production
(MMlbs) 168 169 326 258
- -----------------------------------------------------------------
*Includes equity in affiliates.
10
<PAGE>
Income Statement Analysis
Sales and other operating revenues increased 10 percent and
13 percent for the second quarter and six-month period,
respectively, as a result of higher crude oil, petroleum products
and natural gas prices. These same factors also contributed to
higher purchase costs in both periods.
Equity earnings of affiliated companies declined 44 percent and
71 percent in the second quarter and first six months,
respectively. Lower earnings from the company's equity interest
in Sweeny Olefins Limited Partnership, due to lower ethylene
margins, reduced both periods. In addition, equity earnings for
the six-month period were lower due to a first-quarter 1996
impairment on certain equity companies related to the Point
Arguello field, offshore California. Higher net gains from
assets sales and higher interest income resulted in higher other
revenues for both the second quarter and six-month period.
Controllable costs, composed primarily of production and
operating expenses and selling, general and administrative
expenses, both adjusted for special items, were 2 percent and
1 percent lower in the second quarter and six-month period,
respectively. Lower costs from the company's Norway E&P
operations, crude oil refineries and the GPM segment, partially
offset by higher costs associated with growth-related projects,
contributed to the improvement.
Exploration expenses increased slightly in the second quarter and
27 percent in the six-month period. Higher dry hole charges in
the first quarter of 1996, mainly due to the Alexandrite subsalt
exploratory well in the Gulf of Mexico and an exploratory well in
Algeria, primarily contributed to the higher six-month period
exploration expenses.
After adjusting for property impairments, depreciation, depletion
and amortization (DD&A) was unchanged in the second quarter and
5 percent lower in the six-month period. Primarily responsible
for the decrease were lower U.S. E&P DD&A, due to lower crude oil
production, along with lower DD&A from RM&T and Chemicals due to
new depreciation rates.
Taxes other than income taxes were lower in both the quarter and
year-to-date periods, primarily due to lower federal Superfund
tax accruals. The Superfund tax expired December 31, 1995, and
the law providing for its collection has not been extended.
Interest expense was lower in both the quarter and six-month
period, mainly as a result of lower interest expense on tax
contingencies, due to the favorable resolution of the Kenai LNG
tax case.
11
<PAGE>
Segment Results
E&P Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Reported net income $146 74 237 175
Less special items - (47) (64) (56)
- -----------------------------------------------------------------
Net operating income $146 121 301 231
=================================================================
Average Sales Prices
Crude oil (per barrel)
United States $18.44 15.87 17.59 15.43
Foreign 19.68 18.45 19.31 17.69
Worldwide 19.27 17.58 18.76 16.88
Natural gas--lease (per
thousand cubic feet)
United States 1.80 1.36 1.87 1.34
Foreign 2.42 2.51 2.46 2.46
Worldwide 1.99 1.79 2.07 1.77
- -----------------------------------------------------------------
Worldwide Exploration
Expenses
Geological and geophysical $30 32 58 58
Leasehold impairment 7 7 14 16
Dry holes 7 6 37 13
Lease rentals 3 1 4 2
- -----------------------------------------------------------------
$47 46 113 89
=================================================================
Thousands of Barrels Daily
-------------------------------------
Operating Statistics
Crude Oil Produced
United States 69 80 71 82
Norway 102 100 100 99
United Kingdom 5 3 6 4
Nigeria 25 24 25 23
China 10 10 13 11
Canada 5 5 5 5
- -----------------------------------------------------------------
216 222 220 224
=================================================================
Natural Gas Liquids Produced
United States 4 5 4 5
Norway 8 9 8 9
Other areas 3 1 3 1
- -----------------------------------------------------------------
15 15 15 15
=================================================================
12
<PAGE>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Millions of Cubic Feet Daily
-------------------------------------
Natural Gas Produced
United States (less gas
equivalent of liquids
shown above) 1,131 1,066 1,133 1,080
Norway* 291 310 306 313
United Kingdom* 61 38 79 75
Canada 52 65 53 59
- -----------------------------------------------------------------
1,535 1,479 1,571 1,527
=================================================================
*Dry basis.
Liquefied Natural Gas
Sales 114 98 122 114
- -----------------------------------------------------------------
E&P's net operating income in the second quarter of 1996
increased 21 percent over the second quarter of 1995. For the
first six months of 1996, net operating income was 30 percent
higher than the corresponding period last year. Both 1996
periods benefited from higher worldwide crude oil and U.S.
natural gas sales prices.
Phillips' average 1996 worldwide crude oil sales price reached
$20.87 per barrel in April, then trended down in May and June,
and ended the second quarter with an average sales price of
$19.27--10 percent higher than the same quarter in 1995. The
average sales price for the six-month period was $18.76,
11 percent higher than the corresponding period a year ago.
While strong global demand and low industry inventory levels
created rising crude oil prices late in the first quarter and
into April, sensitivity to external factors not directly tied to
supply/demand fundamentals resulted in a weakening of prices in
the second part of April which continued into May and June.
Among these factors was the market's reaction to Iraq's potential
re-entry into the crude oil market, and how OPEC will respond.
Crude oil prices displayed renewed strength late in June,
however, with higher sales prices at the end of the month than at
the beginning.
13
<PAGE>
U.S. E&P Millions of Dollars
- -------- -------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Reported net income $104 42 143 102
Less special items - (33) (64) (37)
- -----------------------------------------------------------------
Net operating income $104 75 207 139
=================================================================
Net operating income increased 39 percent in the company's U.S.
E&P operations for the second quarter of 1996, and 49 percent for
the first six months. Higher U.S. natural gas sales
prices--32 percent higher for the quarter and 40 percent higher
for the year-to-date period--were primarily responsible for the
improved results. Although higher than a year ago, Phillips'
U.S. E&P natural gas sales prices decreased modestly through the
second quarter due to normal seasonal trends. Crude oil lease
revenues in the second quarter and first six months were
approximately the same as a year ago, as the effect of higher
average sales prices was offset by lower volumes.
U.S. crude oil production continued to trend downward in the
second quarter of 1996, ending with a quarterly average
production rate of 69,000 barrels of oil per day, compared with
80,000 barrels per day in the second quarter of 1995. Continuing
production declines from the Point Arguello field, offshore
California, field declines in the Gulf of Mexico and Prudhoe Bay,
and the effect of non-strategic property dispositions have
resulted in the production declines.
U.S. natural gas production was 6 percent higher in the second
quarter and 5 percent higher in the first six months of 1996,
compared with the corresponding periods last year. For both
periods, the increase is attributable to new production from the
Seastar (Garden Banks Blocks 70/71) field in the Gulf of Mexico,
which came online in mid-year 1995; increases from property
acquisitions in south Louisiana; new wells onshore Gulf Coast;
partially offset by lower production from the South Marsh Island
Blocks 146/147 field, Gulf of Mexico.
Special items in the first six months of 1996 included an
after-tax charge of $45 million for the impairment of the Point
Arguello field and associated assets. During the second quarter
of 1995, a decline in production was experienced from the Point
Arguello field, related to increasing water production from the
reservoir and the deferral of certain projects. Subsequent well
workovers and other measures improved production to 10,350 net
barrels of crude oil per day during the fourth quarter of 1995.
14
<PAGE>
However, volumes again declined to approximately 9,600 net
barrels a day during the first quarter of 1996, as increasing
water encroachment continued to adversely affect production.
Based upon new production data, experience gained from well
workover activity, and technical reviews with the operator, a new
production forecast for the field was made. As a result, an
impairment was taken in the first quarter of 1996, reducing the
net book value to the estimated fair market value. Also included
in special items in the first six months of 1996 were various
contingency accruals, the most significant of which relates to an
unfavorable court judgment regarding producing properties in
Alabama. Special items in the second quarter of 1995 represented
property impairments on an after-tax basis of $33 million, as a
result of the adoption of Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." In
addition, the six-month period included work force reduction
charges.
Foreign E&P Millions of Dollars
- ----------- -------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Reported net income $ 42 32 94 73
Less special items - (14) - (19)
- -----------------------------------------------------------------
Net operating income $ 42 46 94 92
=================================================================
Net operating income from the company's foreign E&P operations
declined $4 million in the second quarter of 1996, compared with
the second quarter of 1995, primarily due to lower natural gas
sales prices and volumes. For the six-month period, net
operating income increased slightly, as higher crude oil sales
prices were mostly offset by lower natural gas revenues.
Foreign crude oil production was up slightly in the second
quarter and increased 5 percent in the six-month period, with
production increases experienced in most operating areas.
Foreign natural gas production declined slightly for both the
quarter and first six months, as lower demand in Norway was
mostly offset by new production and increased demand in the U.K.
sector of the North Sea.
Special items in the second quarter of 1995 primarily included
property impairments on an after-tax basis of $6 million and work
force reduction charges of $7 million after-tax. The six-month
period also included a tax contingency accrual.
15
<PAGE>
GPM Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Reported net income $29 5* 57 8*
Less special items 2 - 2 -
- -----------------------------------------------------------------
Net operating income $27 5 55 8
=================================================================
*Preferred stock dividend requirements of subsidiary was
reclassified to Corporate and Other for segment reporting.
Average Sales Prices
U.S. residue gas (per
thousand cubic feet) $ 2.16 1.48 2.06 1.44
U.S. natural gas liquids
(per barrel--
unfractionated) 12.39 10.23 12.34 10.15
- -----------------------------------------------------------------
Millions of Cubic Feet Daily
-------------------------------------
Operating Statistics
Natural Gas Purchases
Outside Phillips 1,409 1,246 1,358 1,238
Phillips 175 197 179 198
- -----------------------------------------------------------------
1,584 1,443 1,537 1,436
=================================================================
Raw Gas Throughput 1,938 1,624 1,915 1,603
- -----------------------------------------------------------------
Residue Gas Sales
Outside Phillips 996 830 997 848
Phillips 84 190 83 168
- -----------------------------------------------------------------
1,080 1,020 1,080 1,016
=================================================================
Thousands of Barrels Daily
-------------------------------------
Natural Gas Liquids Net
Production
From Phillips E&P
leasehold gas 17 19 17 20
From gas purchased
outside Phillips 133 124 128 124
- -----------------------------------------------------------------
150 143 145 144
=================================================================
GPM's net operating income increased $22 million and $47 million
for the second quarter and first six months of 1996,
respectively, compared with the same periods in 1995. The
improvements were mainly the result of improved margins, due to
higher natural gas liquids (NGL) and residue gas sales prices,
higher raw gas throughput volumes, and lower controllable costs.
16
<PAGE>
NGL prices have increased primarily as a result of low industry
inventories and increased demand for NGL as a petrochemical
feedstock. NGL production volumes increased 5 percent in the
second quarter, mainly due to higher NGL extractions and
operating consistency at the Linam Ranch plant, New Mexico, and
acquisitions completed at the end of 1995.
Residue gas sales prices benefited from a cold winter in North
America, compared with a mild winter in 1994-1995, impacting both
demand for gas and storage levels in the first quarter of 1996.
The effect of lower storage levels and higher summer cooling
demand resulted in the continuation of strong residue gas prices
through the second quarter of 1996.
The increase in residue gas sales volumes was primarily the
result of expansion in the Austin Chalk area of Central Texas and
acquisitions completed at the end of 1995.
Controllable costs were 23 percent and 26 percent lower for the
second quarter and first six months, respectively, reflecting
continuous cost improvement efforts, such as technology
enhancements, plant modernizations, plant consolidations and
reengineering efforts completed in 1995.
Special items in the second quarter of 1996 represented a gain on
the sale of an NGL plant and gathering system.
RM&T Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Reported net income $39 12 56 7
Less special items (1) (1) (1) (1)
- -----------------------------------------------------------------
Net operating income $40 13 57 8
=================================================================
Average Sales Prices
(per gallon)
Automotive gasoline-
wholesale $.70 .65 .65 .60
Automotive gasoline-retail .86 .79 .81 .75
Distillates .63 .52 .60 .50
Propane .41 .36 .45 .36
- -----------------------------------------------------------------
17
<PAGE>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Thousands of Barrels Daily
-------------------------------------
Operating Statistics
U.S. Refinery Crude Oil
Capacity 345 345 345 345
Refined 318 333 315 327
Capacity utilization
(percent) 92% 97 91 95
- -----------------------------------------------------------------
Petroleum Products Outside
Sales
United States
Automotive gasoline-
wholesale 289 293 288 283
Automotive gasoline-
retail 38 35 36 35
Aviation fuels 25 29 24 30
Distillates 136 137 135 134
Propane 10 11 26 24
Other products 17 21 16 19
- -----------------------------------------------------------------
515 526 525 525
Foreign 48 50 47 50
- -----------------------------------------------------------------
563 576 572 575
=================================================================
RM&T had net operating income of $40 million in the second quarter
of 1996, a sharp improvement from $13 million in last year's
second quarter. For the first six months, net operating income
was $57 million, up significantly from $8 million reported in the
first six months of 1995. The much improved results in both 1996
periods are attributable primarily to higher distillates margins,
and, to a lesser extent, higher motor fuel margins.
Industry-wide distillates inventories were drawn down in the first
quarter because of strong demand for heating oils during the cold
winter months. This tight supply situation, compared with last
year, continued in the second quarter, supporting improved
distillates prices. However, crude oil and NGL feedstock costs
were higher in both the 1996 second quarter and six-month period,
partially offsetting the benefit of higher average distillates and
motor fuel sales prices, and resulting in continued tight margins
in this highly competitive business.
The company's refineries continued to improve their cost
structures, with controllable costs down 4 percent and 5 percent
for the quarter and six-month periods, respectively. Crude runs
to refineries were lower during the second quarter and first six
18
<PAGE>
months, due to turnarounds at the company's Borger and Sweeny,
Texas, refineries during the first half of 1996.
Special items in 1996 related to property damage caused by
equipment failure at the Sweeny refinery, while special items in
1995 represented work force reduction charges.
Chemicals Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Reported net income $ 83 112 153 208
Less special items - (8) (7) (8)
- -----------------------------------------------------------------
Net operating income $ 83 120 160 216
=================================================================
Millions of Pounds,
Except as Indicated
-------------------------------------
Operating Statistics
Production*
Ethylene 618 625 1,313 1,259
Polyethylene 504 474 1,017 914
Propylene 101 109 213 219
Polypropylene 53 114 142 219
Paraxylene 168 169 326 258
Cyclohexane (millions
of gallons) 42 20 85 47
- -----------------------------------------------------------------
*Includes equity in affiliates.
Thousands of Barrels Daily
-------------------------------------
U.S. Petroleum Products
Outside Sales
Automotive gasoline 9 6 11 5
Liquefied petroleum gas 84 82 77 76
Other products 28 40 29 38
- -----------------------------------------------------------------
121 128 117 119
=================================================================
Natural Gas Liquids
Processing capacity 250 227 250 227
Liquids processed 208 189 202 203
- -----------------------------------------------------------------
Chemicals' net operating income declined from a year ago for both
the second quarter and six-month period. For the quarter, results
were down due to lower margins for ethylene, polyethylene and
paraxylene, partially offset by higher sales volumes for ethylene
and polyethylene. For the six-month period, the reasons for the
lower results were primarily the same as in the quarter, with the
19
<PAGE>
exception of paraxylene margins, which were about the same in the
six-month period as last year. Although results are lower than
the comparable periods last year, Chemicals' net operating income
has shown continued improvement over the previous two quarters.
Industry ethylene demand was favorable in the second quarter, and,
although industry inventories remained low, supplies were able to
meet customer demand while allowing for some price increases.
Paraxylene demand dropped sharply in the second quarter, as
worldwide demand for polyester, for which paraxylene is a
feedstock, softened as a result of inventory reductions and lower
demand throughout the polyester product chain.
Polyethylene demand, particularly in the domestic market, remained
strong throughout the second quarter, allowing for some upward
pricing movement. However, increasing feedstock costs continued
to squeeze margins in this highly competitive industry.
Polypropylene demand was strong in the second quarter, resulting
in improved margins when compared with the first quarter of 1996.
Production volumes were lower because of a plant maintenance
turnaround performed in the second quarter of 1996.
Special items in the first half of 1996 represented a tax item
related to the company's Puerto Rico Core operations. Special
items in the second quarter of 1995 included property impairments
of $3 million on an after-tax basis and an income tax adjustment.
Corporate and Other Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995* 1996 1995*
------------------ ----------------
Reported Corporate and
Other $(76) (90) 413 (174)
Less special items (1) (9) 555 (10)
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(75) (81) (142) (164)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(32) (31) (60) (59)
Net interest (36) (43) (72) (87)
Preferred dividend
requirements (10) (8) (18) (16)
Other 3 1 8 (2)
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(75) (81) (142) (164)
=================================================================
*Preferred stock dividend requirements of subsidiary was
reclassified from GPM to Corporate and Other for segment
reporting.
20
<PAGE>
Corporate general and administrative expenses changed only
slightly in both the second quarter and first six months of 1996,
compared with the corresponding periods in 1995. While salary
expenses, a significant component of Corporate general and
administrative expenses, were lower in 1996, costs retained at
Corporate and not allocated to operating segments were higher,
resulting in only a small change in Corporate expenses compared
with a year ago.
Net interest represents interest income and expense, net of
capitalized interest. Net interest was lower in both the second
quarter and first six months of 1996 due to lower interest
expense on tax contingencies resulting from the favorable
resolution of the Kenai LNG tax case.
Preferred dividend requirements includes dividends on the
Phillips Gas Company preferred stock and on the preferred
securities of the Phillips 66 Capital I trust.
Other consists primarily of the company's insurance operations,
along with income tax and other items that are not directly
associated with the operating segments on a stand-alone basis.
Other benefited from improved results from the company's
captive insurance subsidiary, along with lower tax accruals not
directly associated with the operating segments.
Special items in 1996 included an after-tax gain of $565 million
related to the favorable settlement of the company's Kenai LNG
tax case. Special items in the second quarter of 1995 included
property impairments on an after-tax basis of $7 million.
21
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-----------------------------
At At At
June 30 December 31 June 30
1996 1995 1995
----------------------------
Current ratio 1.2 .9 1.0
Long-term debt $2,954 3,097 2,977
Preferred stock of subsidiary $ 345 345 345
Company-obligated mandatorily
redeemable preferred securities $ 300 - -
Common stockholders' equity $3,982 3,188 3,092
Percent of long-term debt
to capital* 39% 47 46
Percent of floating-rate debt
to total debt 19% 22 20
- -----------------------------------------------------------------
*Capital includes long-term debt, preferred stock of subsidiary,
company-obligated mandatorily redeemable preferred securities
and common stockholders' equity.
Cash from operations increased slightly for the six-month period
ended June 30, 1996, compared with the same period in 1995. A
net operating income increase of $132 million coupled with a cash
refund from the Internal Revenue Service (IRS) of $209 million,
due to the favorable resolution of the Kenai LNG tax case, were
mostly offset by a $240 million decrease in the aggregate balance
of account receivables sold and a $43 million contribution to the
company's pension funds. Improved operating results and the
Kenai LNG settlement have strengthened the company's equity base,
dropping the percentage of long-term debt to capital to its
lowest level since 1984.
During the first quarter, the company filed with the Securities
and Exchange Commission a shelf registration for $750 million of
trust preferred securities and subordinated debt securities.
This shelf registration became effective in May 1996. In a
related transaction, the company formed four new statutory
business trusts, for the sole purpose of issuing trust securities
and investing the proceeds thereof in an equivalent amount of
Phillips subordinated debt securities. Phillips owns all of the
common stock of the trusts.
During the second quarter, the Phillips 66 Capital I (Trust)
completed a $300 million underwritten public offering of 8.24%
Trust Originated Preferred Securities (Preferred Securities).
The sole asset of the Trust is $309 million of the company's
8.24% Junior Subordinated Deferrable Interest Securities due
2036, purchased from Phillips by the Trust. Phillips fully and
22
<PAGE>
unconditionally guarantees the Trust's obligations under the
Preferred Securities.
During the second quarter of 1996, the company received
$115 million from institutional investors in exchange for a
variable interest in the net proceeds from production of certain
coal-seam gas properties.
The company recently negotiated a master leasing arrangement
under which it will finance the construction and acquisition of
service stations throughout the Midwest, Southwest, West and
Southeast. An initial $50 million of service stations is
expected to be financed under the arrangement over the next year,
after which the company may expand the arrangement to
$300 million. The term of the lease payments is seven years with
a fair market value purchase option at the end of that period,
and includes certain guaranteed residual values if the company
does not exercise the purchase option. Individual leases under
the arrangement are expected to qualify for operating lease
accounting treatment.
On July 8, 1996, Phillips' Board of Directors approved an
increase in the company's quarterly common stock dividend rate,
raising the quarterly per share dividend to $.32, a 5 percent
increase, effective August 30, 1996. This is the second dividend
rate increase in two years.
During the second quarter of 1996, Standard and Poor's upgraded
the rating of Phillips' long-term public debt from BBB to A-, an
increase of two levels. This is the first time the company's
public debt has been rated this high since 1985. The new rating
resulted in reductions in the company's cost of debt. In
addition, Phillips' stock will now be available to some pension
funds, mutual funds and others that invest only in companies
rated A- or higher.
23
<PAGE>
Capital Expenditures and Investments
Millions of Dollars
----------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
Estimated 1996 1996 1995 1996 1995
-------------- ------------------ ----------------
E&P $1,029 275 176 476 323
GPM 80 16 43 29 72
RM&T 204 39 36 91 58
Chemicals 240 44 34 88 76
Corporate
and Other 67 17 12 23 20
- ------------------------------------------------------------------
$1,620 391 301 707 549
==================================================================
United States $ 839 170 191 344 343
Foreign 781 221 110 363 206
- ------------------------------------------------------------------
$1,620 391 301 707 549
==================================================================
The company's improved operating results and the Kenai LNG tax
settlement have enhanced Phillips' financial flexibility. As a
result, in April the company announced a 16 percent increase in
its 1996 capital budget, from $1.4 billion to $1.62 billion. The
boost in spending plans is 11 percent above actual 1995
expenditures, and reaches its highest level since the mid-1980s.
The E&P capital spending program received the largest increase--
from $855 million to $1.029 billion. During the second quarter,
Phillips acquired a subsidiary of Parker and Parsley Petroleum
Company, which held a 22.5 percent interest in permit 91-13 that
contains part of the Bayu-Undan field, offshore Australia and
Indonesia in the Timor Sea. Phillips and its co-venturers
discovered the field early in 1995. With this acquisition,
Phillips' stake in permit 91-13 increased to 60 percent from
37.5 percent.
Phillips and its co-venturers are evaluating plans to develop the
Bayu-Undan field, including plans to construct an onshore
liquefied natural gas processing facility, using Phillips'
proprietary technology to liquefy the natural gas. Following a
second successful well early in 1996, the drilling of a third
appraisal well, which began in March, encountered a thin
productive section of hydrocarbons on the eastern flank of the
field. The well was plugged and abandoned without testing. In
July, a fourth appraisal well tested at 14 million cubic feet of
gas per day and 530 barrels of condensate per day. The company
plans to drill a fifth well in the fourth quarter of 1996.
24
<PAGE>
Capital spending plans for RM&T increased to $204 million from
$175 million, with 58 percent and 42 percent allocated to
refining and marketing, respectively. Marketing's proposed
spending plans for 1996 reflect an increase of more than three
times what was spent in 1995. While capital spending for
refining modernization projects continues, the increase
accelerates plans to expand the number of company-operated retail
outlets in the United States from 300 to 500 over the next
several years. The company is utilizing a recently negotiated
master leasing program to partially support this planned retail
marketing expansion.
The company began its planned expansion of retail marketing
during the first quarter of 1996. During the first six months of
1996, the company purchased 24 retail outlets, the majority of
which are in Albuquerque, New Mexico, and the Salt Lake City,
Utah, region. In second quarter, construction began on four new
stations and four that will be razed and rebuilt using the
company's new larger Kicks service station-convenience store
design. In the third quarter, construction is scheduled to begin
on 15 new outlets, and four existing stations will be razed and
rebuilt.
Spending plans for Chemicals and GPM are unchanged at
$240 million and $80 million, respectively.
Phillips owns a 50 percent interest in Sweeny Olefins Limited
Partnership (SOLP), which owns and operates a 1.5 billion-pound-
per-year ethylene plant located adjacent to the company's Sweeny,
Texas, refinery. Late in 1995, First Olefins Limited Partnership
(FOLP), a general partner of SOLP, filed suit in Delaware against
the company and its subsidiary, American Olefins, Inc., the
managing general partner of SOLP, seeking an injunction to halt
construction on a debottlenecking project at SOLP. The trial
court denied FOLP's application by opinion dated March 1, 1996.
On April 2, 1996, the Delaware Supreme Court denied FOLP's
application for interlocutory appeal, thus effectively
foreclosing the effort to halt construction, which continues as
scheduled.
Funds for the 1996 capital budget will be provided by cash
generated from continuing operations, and from financing.
J-Block Update
The gas reserves in blocks 30/7a and 30/12a (J-Block) offshore
the United Kingdom are dedicated to a single gas purchaser, Enron
Europe Limited (EEL). EEL has advised that its present estimate
of future total daily nominations for delivery is zero through
September 1997.
25
<PAGE>
The J-Block owners are currently installing gas injection
facilities, which will allow for the production of liquids while
the natural gas production is reinjected for later delivery. The
U.K. government has approved these plans and reinjection is
planned to commence in April 1997.
The J-Block owners also own the rights to the reserves in a block
(block 30/6b) immediately adjacent to J-Block, which are in
communication with J-Block reserves but not dedicated under the
above contracts. The J-Block owners are continuing to
investigate transportation, processing and sales of natural gas
from the adjoining block to enable start-up of liquids production
prior to completion of gas injection facilities. In order to
maximize the value of its J-Block infrastructure, the company has
also initiated an active drilling program to explore and appraise
the reserves in blocks 30/2c and 30/13.
On March 29, 1996, the J-Block owners filed legal proceedings in
the English High Court in London seeking a declaration that EEL
as buyer under the J-Block gas sales agreements cannot refuse to
agree to a commissioning date for the J-Block facilities on the
basis of a decline in natural gas prices in the United Kingdom,
and cannot thereby delay commencement of its take-or-pay
obligations under the sales agreements. On May 8, 1996, the
English High Court ruled in favor of the J-Block owners, finding
that EEL could not refuse by virtue of the decline in natural gas
prices to agree to commissioning of the J-Block facilities.
Enron has appealed that judgment. However, following the ruling
on May 8, the J-Block owners asked the Court for additional
relief in the form of damages to be awarded against EEL,
asserting EEL's breach of the gas sales agreements.
Soon after the J-Block owners filed their commissioning-date
lawsuit in London, Enron Corp., EEL, and Teesside Gas
Transportation Limited (TGTL), a wholly owned subsidiary of EEL,
filed a lawsuit in district court in Harris County, Texas. Enron
has asserted that the Capacity Reservation and Transportation
Agreement (CRTA) between TGTL and the owners of the Central Area
Transmission System (CATS), a gas pipeline in the U.K. sector of
the North Sea, has terminated as a result of breaches of the
agreement by the CATS owners. It further asserts that the
J-Block transportation agreements between TGTL and the J-Block
owners, and the J-Block gas sales agreements have likewise
terminated, and that Enron Corp. is discharged from its guarantee
obligations under those agreements. On June 26, 1996, the
English High Court granted Phillips and the other J-Block owners
injunctions prohibiting the Enron companies from proceeding with
their Texas lawsuit. The Court concluded that Enron's lawsuit in
Texas raised issues that should have properly been raised in the
English Court or were essentially the same as issues already in
26
<PAGE>
litigation in the English Court. Enron has appealed this
judgment. However, the U.S. District Court sitting in Houston
has recognized the English High Court injunction and
administratively closed Enron's Texas case.
Further developments in this litigation are anticipated, and the
course of events and range of possible outcomes cannot be
predicted at this time. The company intends to vigorously assert
its interests in each of the pending matters.
The J-Block production, processing and transportation facilities,
located in block 30/7a of the U.K. North Sea, were completed on
schedule and below budget in mid-February and are available for
production and delivery of gas. The J-Block and block 30/6b are
operated by Phillips Petroleum Company United Kingdom Limited,
which has 36.5 percent interest. The company owns 32.5 percent
and 35 percent interest in blocks 30/2c and 30/13, respectively.
Contingencies
Legal and Tax Matters
The company has a number of issues outstanding with the IRS
related to tax years 1979 through 1992 that can proceed toward
final settlement as a result of resolving the Kenai LNG tax case.
Although it is too early to determine the final financial effects
of resolving these years, a favorable outcome would have a
positive effect on net income and cash flow while an unfavorable
one would not impact the company's net income or cash position.
While total resolution may require a number of years, the
earliest years are expected to be resolved in the near term.
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 federal, state, local and foreign
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.
27
<PAGE>
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 now require
investigatory or remedial work to adequately protect the
environment or address new regulatory requirements.
At year-end 1995, Phillips reported 48 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP). Since then, one of these
sites was resolved through a consent decree. Two sites were
added during the six-month period. Of the 49 sites remaining at
June 30, 1996, the company believes it has a legal defense or its
records indicate no involvement for 12 sites. At 6 other sites,
present information indicates that it is probable that the
company's exposure is less than $100,000 per site. At 14 sites,
Phillips has had no communication or activity with government
agencies or other PRPs in more than two years. Of the
17 remaining sites, the company has provided for any probable
costs that can be reasonably estimated.
Phillips does not consider the number of sites at which it has
been designated potentially responsible by state or federal
agencies 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 liability of
those potentially responsible is generally joint and several for
federal sites and frequently so for state sites, the company is
usually but one of many companies cited at a particular site. It
has, to date, been successful in sharing cleanup costs with other
financially sound companies. Many of the sites at which the
company is potentially responsible are still under investigation
by the Environmental Protection Agency (EPA) or the state
agencies concerned. Prior to actual cleanup, those potentially
responsible 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 parties obtain EPA or equivalent state agency approval.
At June 30, 1996, accruals of $9 million had been made for the
company's unresolved PRP sites. In addition, the company has
accrued $92 million for other planned remediation activities,
including resolved state, PRP, and other federal sites, as well
as sites where no claims have been asserted, and $8 million for
other environmental contingent liabilities, for total
28
<PAGE>
environmental accruals of $109 million. No one site represents
more than 10 percent of the total.
After an assessment of environmental exposures for cleanup and
other costs, the company makes accruals on an undiscounted basis
for planned investigation and 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. However, where
applicable, probable insurance recoveries and state
reimbursements have been accrued as receivables. 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.
OUTLOOK
The company's worldwide drilling program continues with projects
in the Norwegian and Danish sectors of the North Sea, and the
Bozhong block, located in China's Bohai Bay. In June, the
company began drilling the first exploration well on the
2.3 million acre Bozhong block, in which the company holds a
100 percent interest. In early 1996, the company was awarded
operatorship and a 30 percent interest in four blocks in the
Norwegian sector of the North Sea east of the Troll field, and a
20 percent non-operating interest in a block near the Norne
field. Drilling on 32/4-1 block east of the Troll field is
scheduled to begin in October. In the Danish sector of the North
Sea, drilling of a second well (Siri 2) is scheduled to begin
during the third quarter of 1996. This appraisal well follows
the successful exploratory Siri 1 well, which tested at
5,800 gross barrels of oil per day, late in 1995. An exploratory
well of an adjacent structure will also be drilled during late
1996.
In April, the company successfully tested the 30/7a-P12 (Jocelyn)
well through the Judy subsea template in J-Block. The well
tested at a rate of 20 million cubic feet of gas per day and
3,800 barrels of condensate per day.
In June, the company signed an exploration/production-sharing
agreement with the Sultanate of Oman. The contract area covers
4.5 million acres in southern Oman, and is adjacent to the
borders of Saudi Arabia and Yemen. Phillips plans to commence
field operations immediately, beginning with an aeromagnetic
survey, scheduled for completion by year-end, followed by
collection of seismic data early in 1997. The company has
29
<PAGE>
committed to drill five wells over the nine-year exploratory
phase of the agreement.
Discussions are continuing with Phillips' co-venturer in the
Sunfish prospect regarding the transfer of the co-venturer's
interests in the South Cook Inlet to the company. The next
appraisal well is included in the 1996 exploration capital
budget. If agreement with the co-venturer is not reached in the
near term, it will not be feasible to spud this well during the
1996 drilling season in the South Cook Inlet.
Oil production from the Point Arguello field, offshore
California, declined to approximately 7,900 net barrels per day
during the second quarter, which was lower than previous
forecasts, compared to approximately 9,600 during the first
quarter. This is attributed to increasing water production and
maintenance related downtime. Work will commence during the
second half of the year to perform well plugbacks and sidetracks
and a hydraulic fracture stimulation project to assist in
mitigating the production decline. In addition, Phillips and the
majority of its co-venturers are pursuing with the Minerals
Management Service the unitization of the Point Arguello field,
which, if successful, will result in a reduction in operating
expense and extension of the economic field life.
The company's proprietary liquefied natural gas (LNG) technology
has been selected by Atlantic LNG Company of Trinidad and Tobago
for a new LNG complex in Trinidad. Phillips' process is designed
to allow economic development of both small and large gas
discoveries. Phillips continues to pursue the licensing of this
technology to others.
Phillips also plans to pursue licensing opportunities of a new
technology, Reduced Volatility Alkylation Process (ReVAP). This
technology, jointly developed with Mobil Oil Corp., should
provide a safer work environment by significantly reducing the
amount of airborne hydrogen fluoride emissions in the event of an
accidental release. The company plans to install and demonstrate
ReVAP at its Woods Cross refinery in Utah. Installation on Woods
Cross refinery's existing hydrogen fluoride alkylation unit will
be ReVAP's first commercial application, and is expected to be
completed by year-end 1996.
The investigation of gasoline pricing reported in the company's
report on Form 10-Q for the quarter ended March 31, 1996, remains
ongoing. However, the company has responded to the inquiries
made of it and does not believe that the ongoing investigation
will have any impact on it.
30
<PAGE>
Previously idled assets are being upgraded at the company's
Sweeny, Texas, facility to increase ethylene production by
400 million pounds per year. The assets are now expected to be
restarted and producing in the first quarter of 1997.
A debottlenecking project is scheduled to begin in November 1996,
at the company's Ryton facility in Borger, Texas. The project
should increase Ryton capacity by 40 percent, an increase from
7,000 to 9,800 metric tons per year, and is scheduled for
completion by year-end 1997. Ryton, a heat- and chemical-
resistant engineering plastic, is used in under-the-hood
automotive parts and fiber applications.
The company plans to expand its polyethylene pipe business in the
Northeast. Phillips has a long-term agreement to lease a plant
being built in Hagerstown, Maryland. Construction began in July
1996, and the company anticipates first production around mid-1997.
The company has reached tentative agreement with the Tennessee
Valley Authority (TVA) and CRSS Tractebel to develop an
electrical power plant to be located in Mississippi. TVA would
be the sole customer for the electricity, and the plant will be
fueled by Phillips' lignite coal reserves located near Ackerman,
Mississippi. Phillips is considering formation of a joint
venture for developing the lignite mine, and has an option to
take up to a 50 percent interest in the power plant.
Late in July, GPM Gas Corporation, a wholly owned subsidiary of
the company, signed a purchase agreement with Amoco Production
Company to acquire approximately 630 miles of gathering pipeline
and Amoco's interest in the North Cowden plant, which are located
in the Permian Basin of West Texas. The gathering facilities
currently gather approximately 40 million cubic feet of gas per
day from about 420 meter stations. The company plans to
integrate the gathering facilities into its existing gathering
facilities and shut down the plant. The acquisition is subject
to Hart-Scott-Rodino review. Pending government approval,
closing is expected in fourth quarter 1996. Payment will be made
upon the latter of closing or January 3, 1997.
On June 11, 1996, Phillips and Conoco Inc., a subsidiary of E. I.
du Pont de Nemours and Company, announced that they had
terminated all discussions regarding the possibility of combining
the company's and Conoco's U.S. refining, marketing and
transportation operations.
31
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual stockholders' meeting on May 13,
1996. A brief description of each proposal and the voting
results follow:
A company proposal to elect thirteen directors.
For Against & Withheld
----------------------------------
W. W. Allen 244,032,946 10,272,243
Norman R. Augustine 246,441,447 7,863,742
George B. Beitzel 244,662,942 9,642,247
David L. Boren 245,306,294 8,998,895
C. L. Bowerman 245,321,751 8,983,438
Robert E. Chappell, Jr. 246,074,880 8,230,309
Lawrence S. Eagleburger 244,987,181 9,318,008
James B. Edwards 245,800,253 8,504,936
Larry D. Horner 245,912,369 8,392,820
J. J. Mulva 242,681,424 11,623,765
Randall L. Tobias 245,954,377 8,350,812
Victoria J. Tschinkel 245,181,624 9,123,565
Kathryn C. Turner 245,210,363 9,094,826
A company proposal to approve the designation of Ernst &
Young LLP as independent auditors for 1996.
For 246,387,553
Against 5,174,772
Abstentions 2,742,864
Not Voted 51,290,775
All thirteen directors were elected, and the independent public
accountants proposed by the company were approved.
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 June 30, 1996, the company did not
file any reports on Form 8-K.
32
<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
(Chief Accounting and Duly
Authorized Officer)
August 9, 1996
33
<PAGE>
Exhibit 12
PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES
TOTAL ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars
------------------------
Six Months Ended
June 30
------------------------
1996 1995
------------------------
(Unaudited)
Earnings Available for Fixed Charges
Income before income taxes $1,324 539
Distributions less than equity in earnings
of less-than-fifty-percent-owned companies 21 4
Fixed charges, excluding capitalized
interest and the portion of the
preferred dividend requirements of a
subsidiary not previously deducted
from income* 167 183
- ----------------------------------------------------------------------------
$1,512 726
============================================================================
Fixed Charges
Interest and expense on indebtedness,
excluding capitalized interest $ 128 146
Capitalized interest 15 13
Preferred dividend requirements of
a subsidiary and a capital trust 25 38
One-third of rental expense, net of
subleasing income, for operating leases 18 16
- ----------------------------------------------------------------------------
$ 186 213
============================================================================
Ratio of Earnings to Fixed Charges 8.1 3.4
- ----------------------------------------------------------------------------
*Includes amortization of capitalized interest totaling approximately
$5 million in both 1996 and 1995.
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.
In 1990 and 1988, respectively, the company guaranteed a $400 million bank
loan and $250 million of notes payable for the Long-Term Stock Savings Plan
(LTSSP), an employee benefit plan. In 1994, the notes payable were
refinanced with a $131 million term loan, and the $400 million loan was
amended in 1994, and again in 1995. Consolidated interest expense included
a minimal amount of interest related to LTSSP borrowings for the first six
months of 1996 and 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Phillips Petroleum Company as of June 30,
1996, and the related consolidated statement of income for the six-month
period ended June 30, 1996, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 223
<SECURITIES> 0
<RECEIVABLES> 1,837
<ALLOWANCES> 20
<INVENTORY> 523
<CURRENT-ASSETS> 2,755
<PP&E> 19,570
<DEPRECIATION> 10,844
<TOTAL-ASSETS> 12,766
<CURRENT-LIABILITIES> 2,352
<BONDS> 2,954
300
0
<COMMON> 613
<OTHER-SE> 3,369
<TOTAL-LIABILITY-AND-EQUITY> 12,766
<SALES> 7,532
<TOTAL-REVENUES> 7,577
<CGS> 6,295<F1>
<TOTAL-COSTS> 6,427<F2>
<OTHER-EXPENSES> 18<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> 1,324
<INCOME-TAX> 408
<INCOME-CONTINUING> 916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 916
<EPS-PRIMARY> 3.49
<EPS-DILUTED> 3.49
<FN>
<F1>Purchased crude oil and products + Production and operating expenses +
Exploration expenses + Depreciation, depletion and amortization.
<F2>CGS + Taxes other than income taxes.
<F3>Preferred dividend requirements of subsidiary and capital trust.
</FN>
</TABLE>
