SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -------------------
Commission file number 1-720
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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 262,910,929 shares of common stock, $1.25 par value,
outstanding at April 30, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995*
-------------------
Revenues
Sales and other operating revenues $3,595 3,087
Equity in earnings of affiliated companies (2) 29
Other revenues 9 8
- -----------------------------------------------------------------
Total Revenues 3,602 3,124
- -----------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 2,206 1,828
Production and operating expenses 520 499
Exploration expenses 66 43
Selling, general and administrative expenses 126 114
Depreciation, depletion and amortization 241 211
Taxes other than income taxes 66 70
Interest expense 59 68
Preferred dividend requirements of subsidiary 8 8
- -----------------------------------------------------------------
Total Costs and Expenses 3,292 2,841
- -----------------------------------------------------------------
Income before income taxes and interest
effects of Kenai LNG tax settlement 310 283
Interest effects of Kenai LNG tax settlement 571 -
- -----------------------------------------------------------------
Income before income taxes 881 283
Provision for income taxes 186 172
- -----------------------------------------------------------------
Net Income $ 695 111
=================================================================
Per Share of Common Stock
Net Income $ 2.65 .43
=================================================================
Dividends paid $ .305 .28
Average Common Shares Outstanding
(in thousands) 262,309 261,675
- -----------------------------------------------------------------
See Notes to Financial Statements.
*Certain amounts have been reclassified to conform to current
presentation.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-----------------------
March 31 December 31
1996 1995
-----------------------
Assets
Cash and cash equivalents $ 164 67
Accounts and notes receivable (less
allowances: 1996--$17; 1995--$15) 1,623 1,522
Inventories 472 505
Deferred income taxes 109 229
Prepaid expenses and other current assets 84 86
- -----------------------------------------------------------------
Total Current Assets 2,452 2,409
Investments and long-term receivables 1,017 841
Properties, plants and equipment (net) 8,539 8,493
Deferred income taxes 110 121
Deferred charges 118 114
- -----------------------------------------------------------------
Total $12,236 11,978
=================================================================
Liabilities
Accounts payable $ 1,463 1,494
Long-term debt due within one year 19 19
Accrued income and other taxes 654 922
Other accruals 336 380
- -----------------------------------------------------------------
Total Current Liabilities 2,472 2,815
Long-term debt 2,910 3,097
Accrued dismantlement, removal and
environmental costs 692 657
Deferred income taxes 953 948
Employee benefit obligations 412 400
Other liabilities and deferred credits 623 522
- -----------------------------------------------------------------
Total Liabilities 8,062 8,439
- -----------------------------------------------------------------
Preferred Stock of Subsidiary and Other
Minority Interests 351 351
- -----------------------------------------------------------------
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 1,982 1,966
Treasury stock (at cost:
1996--14,440,881 shares;
1995--15,047,246 shares) (791) (827)
Compensation and Benefits Trust (CBT)
(at cost: 29,200,000 shares) (989) (989)
Foreign currency translation adjustments 30 39
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (405) (414)
Retained earnings 3,613 3,030
- -----------------------------------------------------------------
Total Stockholders' Equity 3,823 3,188
- -----------------------------------------------------------------
Total $12,236 11,978
=================================================================
See Notes to Financial Statements.
2
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Cash Flows from Operating Activities
Net income $ 695 111
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 241 211
Dry hole costs and leasehold impairment 37 16
Deferred taxes 49 (3)
Increase (decrease) in aggregate balance
of accounts receivable sold (60) 50
Decrease (increase) in other accounts
and notes receivable (44) 18
Decrease (increase) in inventories 32 (5)
Decrease in prepaid expenses and other
current assets 2 3
Decrease in accounts payable (26) (131)
Increase (decrease) in taxes and other
accruals (100) 102
Other (119) (20)
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 707 352
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments,
including dry hole costs (316) (248)
Proceeds from asset dispositions 5 19
Long-term advances to affiliates and
other investments (23) (6)
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (334) (235)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 250 154
Repayment of debt (443) (178)
Issuance of company stock 10 3
Dividends paid (80) (73)
Other (13) (18)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (276) (112)
- -----------------------------------------------------------------
Increase in Cash and Cash Equivalents 97 5
Cash and cash equivalents at beginning
of period 67 193
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 164 198
=================================================================
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--Accounting Changes
Effective January 1, 1996, the company made certain changes in
the estimated useful lives of its major domestic downstream
facilities. This change increased first quarter 1996 net income
by $5 million, $.02 per share. 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, first
quarter 1996 net income was $3 million higher, $.01 per share.
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.
Note 3--Inventories
Inventories consisted of the following:
Millions of Dollars
-----------------------
March 31 December 31
1996 1995
-----------------------
Crude oil and petroleum products $152 173
Chemical products 242 245
Materials, supplies and other 78 87
- -----------------------------------------------------------------
$472 505
=================================================================
4
<PAGE>
Note 4--Properties, Plants and Equipment
Properties, plants and equipment included the following:
Millions of Dollars
-----------------------
March 31 December 31
1996 1995
-----------------------
Properties, plants and equipment
(at cost) $19,273 19,088
Less accumulated depreciation,
depletion and amortization 10,734 10,595
- -----------------------------------------------------------------
$ 8,539 8,493
=================================================================
Note 5--Impairment of Point Arguello Field
During the second quarter of 1995, a decline in production was
experienced from the Point Arguello field offshore California,
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. However, volumes
again declined to approximately 9,600 net barrels a day during
the first quarter of 1996, and increasing water encroachment
continues to adversely affect production. New production data,
experience gained from recent well workover activity, and
technical reviews with the operator enabled the development of a
new production forecast for the field. Based upon the new
forecast, 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 $1,100 million 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. At March 31,
1996, $27 million of the revolving bank credit facility and no
commercial paper were outstanding.
The company's wholly owned subsidiary, Phillips Petroleum Company
Norway, also has a revolving credit facility for $500 million.
No amounts were outstanding under this facility at March 31,
1996.
5
<PAGE>
Note 7--Kenai LNG Tax Settlement
In November 1995, the U.S. Court of Appeals for the Tenth Circuit
affirmed the U.S. Tax Court's previous decisions related to the
company's sales of liquefied natural gas (LNG) from the Kenai,
Alaska, facility to Japan. The Tax Court's decisions supported
the company's position that more than 50 percent of the income
for the years 1975-1978 was from a foreign source. The Appellate
Court's decision became final on February 26, 1996, when the
Internal Revenue Service (IRS) elected not to petition the U.S.
Supreme Court to review the November 1995 decision. The
favorable resolution of this issue had a positive effect on
Phillips' first quarter 1996 net income of $565 million.
Note 8--Income Taxes
The company's effective tax rates for the three-month periods
ended March 31, 1996 and 1995, were 21 and 61 percent,
respectively. The decrease was due mainly to the favorable
resolution of the Kenai tax litigation, discussed in Note 7.
Excluding Kenai, the effective tax rate for the three-month
period ending March 31, 1996, would have been 58 percent.
Note 9--Contingencies
In the case of all known contingencies, the company accrues a
charge for a loss when the loss is probable and the amount is
reasonably estimable. These accruals are not discounted for
delays in future payment and are not reduced for potential
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
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
6
<PAGE>
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 that can proceed toward final settlement as a result
of resolving the Kenai LNG tax proceeding. Although a favorable
resolution of these issues would have a positive effect on net
income and cash flow, it is too early to determine the outcome,
when the issues will be resolved, or the final financial effects.
An unfavorable outcome of the issues would not impact the
company's net income or cash position.
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.
7
<PAGE>
Note 10--Cash Flow Information
Cash payments and non-cash financing activities for the three-
month periods ended March 31 were as follows:
Millions of Dollars
-------------------
1996 1995
-------------------
Cash Payments
Interest
Debt $ 53 52
Taxes and other 5 4
- -----------------------------------------------------------------
$ 58 56
=================================================================
Income taxes $ 28 29
- -----------------------------------------------------------------
Non-Cash Financing Activities
Treasury stock awards canceled under
incentive compensation plans $ 3 -
Issuance of promissory note to purchase
service stations 7 -
- -----------------------------------------------------------------
8
<PAGE>
- -----------------------------------------------------------------
Management's Discussion and Analysis Phillips Petroleum Company
RESULTS OF OPERATIONS
A summary of the company's net income, by business segment and
consolidated, follows:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Exploration and Production (E&P) $ 91 101
Gas Gathering, Processing and Marketing (GPM) 28 3*
Refining, Marketing and Transportation (RM&T) 17 (5)
Chemicals 70 96
Corporate and Other 489 (84)*
- -----------------------------------------------------------------
Net Income $695 111
=================================================================
*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
March 31
-------------------
1996 1995
-------------------
Property impairments $(45) -
Pending claims and settlements (28) -
Kenai LNG tax settlement 565 -
Work force reduction charges (1) (5)
Foreign currency gains - 1
Other items (6) (6)
- -----------------------------------------------------------------
Total special items $485 (10)
=================================================================
Excluding the above special items, net operating income was
$210 million for the three-month period ended March 31, 1996,
compared with $121 million for the three-month period ended
March 31, 1995. This 74 percent increase is attributable to
higher net operating income from the company's E&P, GPM and RM&T
segments. E&P benefited from higher crude oil and natural gas
sales prices, and GPM lowered its cost structure while increasing
raw gas throughput volumes through acquisitions. The improvement
in RM&T was primarily due to higher distillates margins.
9
<PAGE>
Chemicals' earnings were lower than the same period a year ago,
as higher paraxylene margins and higher ethylene, polyethylene
and paraxylene sales volumes were not enough to offset lower
ethylene and polyethylene margins.
Three Months Ended
March 31
-------------------
Phillips at a Glance 1996 1995
-------------------
U.S. crude oil production (MBD) 72 84
Worldwide crude oil production (MBD) 224 225
U.S. natural gas production (MMCFD) 1,134 1,095
Worldwide natural gas production (MMCFD) 1,608 1,576
Worldwide natural gas liquids
production (MBD) 155 161
Liquefied natural gas sales (MMCFD) 131 131
Refinery utilization rate (%) 90 93
U.S. automotive gasoline sales (MBD) 334 312
U.S. distillates sales (MBD) 134 131
Worldwide petroleum products sales (MBD) 694 684
Natural gas liquids processed (MBD) 196 217
Ethylene production (MMlbs)* 695 634
Polyethylene production (MMlbs)* 513 440
Polypropylene production (MMlbs)* 89 105
Paraxylene production (MMlbs) 158 89
- -----------------------------------------------------------------
*Includes equity in affiliates.
Income Statement Analysis
Sales and other operating revenues increased 16 percent when
comparing the first quarter of 1996 with the first quarter of
1995. The increase is attributable to higher crude oil prices,
which increased revenues in both the E&P segment and the RM&T
segment. RM&T buys and sells crude oil in order to most
efficiently supply the company's refineries with crude oil. In
addition, petroleum products and natural gas revenues were
higher, primarily due to higher sales prices. These factors also
accounted for the corresponding increase in purchase costs.
Equity earnings of affiliated companies were $31 million lower in
the first quarter of 1996, compared with the first quarter of
1995, as a result of an impairment taken on equity companies
related to the Point Arguello field, as well as lower earnings
from the company's interest in Sweeny Olefins Limited
Partnership, due to lower ethylene margins. Other revenues
increased slightly compared with the first quarter of last year.
10
<PAGE>
Controllable costs, composed primarily of production and
operating expenses and selling, general and administrative
expenses, both adjusted for special items, were down slightly
compared with the first quarter of 1995, and were down 5 percent
when compared with 1995's average quarterly cost. These lower
costs were achieved even though overall product volumes
increased.
Exploration expenses were higher in the first quarter of 1996,
compared with the first quarter of 1995, mainly due to higher dry
hole charges. The Alexandrite subsalt exploratory well in the
Gulf of Mexico and an exploratory well in the Borj Messouda area
of eastern Algeria accounted for approximately half of the
$30 million dry hole charge in the first quarter of 1996.
After adjusting for property impairments, depreciation, depletion
and amortization (DD&A) was 10 percent lower in the first quarter
of 1996, compared with the corresponding quarter a year ago.
U.S. E&P operations were primarily responsible for the decrease,
due to lower crude oil production, property dispositions, and
reserve increases. The effect of a change, made January 1, 1996,
in the estimated useful lives of the company's major domestic
RM&T and Chemicals facilities and a change in the method of
depreciating the company's GPM assets reduced first quarter 1996
depreciation expense by $13 million. This effect was
substantially offset by increased depreciation expense as a
result of asset acquisitions and capital additions.
Taxes other than income taxes were 6 percent lower than the first
quarter of 1995, due primarily to lower federal Superfund tax
accruals. Interest expense was lower in the first quarter of
1996, compared with the same period last year, as interest
expense on tax contingencies were lower due to the favorable
resolution of the Kenai LNG tax case.
11
<PAGE>
Segment Results
E&P Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Reported net income $ 91 101
Less special items (64) (9)
- -----------------------------------------------------------------
Net operating income $155 110
=================================================================
Sales prices, exploration expenses and operating statistics were:
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Average Sales Prices
Crude oil (per barrel)
United States $16.77 15.02
Foreign 18.98 16.82
Worldwide 18.29 16.14
Natural gas--lease
(per thousand cubic feet)
United States 1.95 1.32
Foreign 2.50 2.42
Worldwide 2.15 1.76
- -----------------------------------------------------------------
Millions of Dollars
-------------------
Worldwide Exploration Expenses
Geological and geophysical $ 28 26
Leasehold impairment 7 9
Dry holes 30 7
Lease rentals 1 1
- -----------------------------------------------------------------
$ 66 43
=================================================================
Thousands of
Barrels Daily
-------------------
Operating Statistics
Crude Oil Produced
United States 72 84
Norway 97 97
United Kingdom 7 4
Nigeria 26 22
China 17 13
Canada 5 5
- -----------------------------------------------------------------
224 225
=================================================================
12
<PAGE>
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Thousands of
Barrels Daily
-------------------
Natural Gas Liquids Produced
United States 5 5
Norway 8 9
Other areas 2 1
- -----------------------------------------------------------------
15 15
=================================================================
Millions of
Cubic Feet Daily
-------------------
Natural Gas Produced
United States (less gas equivalent
of liquids shown above) 1,134 1,095
Norway* 321 316
United Kingdom* 99 112
Canada 54 53
- -----------------------------------------------------------------
1,608 1,576
=================================================================
*Dry basis.
Liquefied Natural Gas Sales 131 131
- -----------------------------------------------------------------
Net operating income in the first quarter of 1996 from the
company's E&P segment increased 41 percent over the same quarter
in 1995. Higher natural gas sales prices, particularly in the
United States, along with higher crude oil sales prices and lower
U.S. depreciation, depletion and amortization (DD&A) contributed
to the improvement in net operating income. These items were
partially offset by higher exploration expenses, due primarily to
higher dry hole charges.
Phillips' worldwide crude oil sales prices averaged $18.29 per
barrel in the first quarter of 1996, 13 percent higher than the
first quarter a year ago. The industry supply/demand balance
shifted in favor of producers during the first quarter, on higher
global demand and very low global inventories of crude oil.
13
<PAGE>
U.S. E&P Millions of Dollars
- -------- -------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Reported net income $ 39 60
Less special items (64) (4)
- -----------------------------------------------------------------
Net operating income $103 64
=================================================================
Net operating income increased 61 percent in the company's U.S.
E&P operations. Higher U.S. natural gas prices--48 percent
higher than the first quarter of 1995--were primarily responsible
for the improved results. U.S. natural gas prices have trended
upward since the third quarter of 1995, when the company's sales
prices hit a 15-year low. A colder than normal winter resulted
in increased industry demand and a reduction in industry-wide
storage levels that was steeper than a year ago. As a result,
the company's U.S. natural gas sales price increased
significantly, averaging $1.95 per thousand cubic feet in the
first quarter, compared with $1.32 in the first quarter of 1995.
Excluding the special item discussed below, U.S. E&P's DD&A
charges were lower in the first quarter of 1996, compared with
the same quarter a year ago, due to lower crude oil production,
property dispositions, and reserve increases. Crude oil lease
revenues were lower in the first quarter, because higher average
sales prices were more than offset by lower production.
Exploration expenses were higher than the first quarter of 1995,
as the company charged exploration wells in the Gulf of Mexico
(Alexandrite) and Nevada to dry holes. First quarter 1995
results did not contain any significant U.S. dry hole charges.
U.S. crude oil production continued to trend downward in the
first quarter of 1996, ending with a quarterly average production
rate of 72,000 barrels of oil per day, compared with 84,000
barrels of oil per day in the same period last year. Lower
production from Point Arguello, Prudhoe Bay and the Gulf of
Mexico, along with the effect of property dispositions, led to
lower production rates. U.S. natural gas production rates were
4 percent higher than a year ago, due to higher production from
the San Juan Basin; new production from the Seastar (Garden Banks
Blocks 70/71) field, which came online in mid-year 1995;
partially offset by lower production from the South Marsh Island
146/147 field.
14
<PAGE>
Special items in the first quarter of 1996 included an after-tax
charge of $45 million for the impairment of the Point Arguello
field and associated assets. New production data, experience
gained from recent well workover activity, and technical reviews
with the operator of the field enabled the development of a new
production forecast for the field. Based upon the new forecast,
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. Also included in special items in the first
quarter of 1996 were various contingency accruals, primarily a
court judgment regarding producing properties in Alabama.
Special items in the first quarter of 1995 consisted of work
force reduction charges.
Foreign E&P Millions of Dollars
- ----------- -------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Reported net income $52 41
Less special items - (5)
- -----------------------------------------------------------------
Net operating income $52 46
=================================================================
Net operating income from the company's foreign E&P operations
increased 13 percent in the first quarter of 1996, compared with
the first quarter of 1995, due to higher crude oil revenues,
partially offset by higher exploration expenses. Crude oil
revenues increased because of higher production rates and average
sales prices. Exploration expenses increased over the same
period a year ago as a result of a dry hole in the Borj Messouda
area of eastern Algeria, as well as dry holes in the United
Kingdom sector of the North Sea.
Foreign crude oil production was 8 percent higher than the
corresponding quarter of 1995, due to higher production in
Nigeria, United Kingdom and China. Foreign natural gas
production was slightly lower than the first quarter of 1995,
because of lower production in the U.K. sector of the North Sea.
Special items in the first quarter of 1995 consisted of a tax
contingency accrual.
15
<PAGE>
GPM Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Reported net income $28 3*
Less special items - -
- -----------------------------------------------------------------
Net operating income $28 3
=================================================================
*Preferred stock dividend requirements of subsidiary was
reclassified to Corporate and Other for segment reporting.
Sales prices and operating statistics for GPM were:
Three Months Ended
March 31
-------------------
Average Sales Prices 1996 1995
-------------------
U.S. residue gas
(per thousand cubic feet) $ 1.96 1.40
U.S. natural gas liquids
(per barrel--unfractionated) 12.29 10.07
- -----------------------------------------------------------------
Millions of
Cubic Feet Daily
-------------------
Operating Statistics
Natural Gas Purchases
Outside Phillips 1,307 1,230
Phillips 183 198
- -----------------------------------------------------------------
1,490 1,428
=================================================================
Raw Gas Throughput 1,892 1,581
- -----------------------------------------------------------------
Residue Gas Sales
Outside Phillips 997 867
Phillips 83 145
- -----------------------------------------------------------------
1,080 1,012
=================================================================
Thousands of
Barrels Daily
-------------------
Natural Gas Liquids Net Production
From Phillips E&P leasehold gas 18 20
From gas purchased outside Phillips 122 126
- -----------------------------------------------------------------
140 146
=================================================================
GPM's net operating income improved substantially compared with
the first quarter of 1995. Almost half of the improvement can be
attributed to lower operating costs, as GPM's plant modernization
projects, plant consolidations, reengineering efforts and
implementation of technology enhancements resulted in a much
improved cost structure.
16
<PAGE>
Higher residue gas and natural gas liquids sales prices and
higher raw gas throughput volumes provided the remaining benefit
to GPM during the first quarter of 1996. Natural gas liquids
prices benefited from higher energy prices and demand for natural
gas liquids as petrochemical feedstocks, while low industry
storage levels and colder than normal weather helped support
higher residue gas sales prices.
GPM's raw gas throughput volumes increased 20 percent in the
first quarter of 1996, compared with the first quarter of 1995,
primarily due to acquisitions.
RM&T Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Reported net income (loss) $17 (5)
Less special items - -
- -----------------------------------------------------------------
Net operating income (loss) $17 (5)
=================================================================
Sales prices and operating statistics for RM&T were:
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Average Sales Prices (per gallon)
Automotive gasoline-wholesale $.59 .55
Automotive gasoline-retail .75 .71
Distillates .58 .49
Propane .45 .36
- -----------------------------------------------------------------
17
<PAGE>
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Thousands of
Barrels Daily
-------------------
Operating Statistics
U.S. Refinery Crude Oil
Capacity 345 345
Refined 312 320
Capacity utilization (percent) 90% 93
- -----------------------------------------------------------------
Petroleum Products Outside Sales
United States
Automotive gasoline-wholesale 287 272
Automotive gasoline-retail 35 35
Aviation fuels 23 31
Distillates 134 131
Propane 41 37
Other products 14 18
- -----------------------------------------------------------------
534 524
Foreign 46 49
- -----------------------------------------------------------------
580 573
=================================================================
The RM&T segment's net operating results improved in the first
quarter of 1996, compared with the first quarter of 1995. The
$22 million improvement is attributable primarily to improved
distillates margins, along with slightly higher gasoline margins.
The improved product margins were attained even though the
company's crude oil feedstock costs were 8 percent higher than
the first quarter a year ago. As a result, margins, though
better than the same period last year, remained tight in this
highly competitive market. Unscheduled downtime at the company's
Borger, Texas, refinery during the first quarter resulted in a
lower crude oil capacity utilization percentage than the
corresponding quarter last year.
Controllable costs at the company's three U.S. refineries
decreased 6 percent in the first quarter of 1996, relative to the
first quarter of 1995, as RM&T continued to pursue its goal of
lowering the cost structure of its refineries.
18
<PAGE>
Chemicals Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Reported net income $70 96
Less special item (7) -
- -----------------------------------------------------------------
Net operating income $77 96
=================================================================
Operating statistics for Chemicals were:
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Millions of Pounds
Except as Indicated
-------------------
Operating Statistics
Production*
Ethylene 695 634
Polyethylene 513 440
Propylene 112 110
Polypropylene 89 105
Paraxylene 158 89
Cyclohexane (millions of gallons) 43 27
- -----------------------------------------------------------------
*Includes equity in affiliates.
Thousands of
Barrels Daily
-------------------
U.S. Petroleum Products Outside Sales
Automotive gasoline 12 5
Liquefied petroleum gas 71 70
Other products 31 36
- -----------------------------------------------------------------
114 111
=================================================================
Natural Gas Liquids
Processing capacity 250 227
Liquids processed 196 217
- -----------------------------------------------------------------
The Chemicals segment's operating performance in the first
quarter of 1996 was highlighted by higher production and sales
volumes in most major product lines, along with higher paraxylene
margins. This served to partially offset the effect of lower
ethylene and polyethylene margins. Overall, net operating income
decreased 20 percent compared with the first quarter of 1995.
After peaking in the first quarter of 1995, ethylene margins
decreased during the remainder of 1995, with a particularly steep
decline in the second half of the year. Although ethylene
19
<PAGE>
margins continued to decline in the first quarter of 1996, the
rate of decline slowed. Paraxylene production, sales and margins
were higher in the first quarter of 1996 than they were in the
corresponding quarter a year ago, leading to improved results
from this product line.
Demand in the polyethylene business line was strong during the
first quarter of 1996, leading to higher sales and production
volumes, compared with the first quarter a year ago. However,
industry-wide pricing competition kept industry sales prices
down, resulting in lower margins.
The special item in the first quarter of 1996 was a tax item
related to the company's Puerto Rico Core operations.
Corporate and Other Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995*
-------------------
Reported Corporate and Other $489 (84)
Less special items 556 (1)
- -----------------------------------------------------------------
Adjusted Corporate and Other $(67) (83)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(28) (28)
Net interest (36) (44)
Preferred dividend requirements
of Phillips Gas Company (8) (8)
Other 5 (3)
- -----------------------------------------------------------------
Adjusted Corporate and Other $(67) (83)
=================================================================
*Preferred stock dividend requirements of subsidiary was
reclassified from GPM to Corporate and Other for segment
reporting.
Corporate general and administrative expenses were unchanged in
the first quarter of 1996, compared with the first quarter last
year.
Net interest represents interest income and expense, net of
capitalized interest. Net interest expense was lower in the
first quarter of 1996, relative to the first quarter of 1995, due
to lower interest expense on prior years' federal income tax
liabilities resulting from the resolution of the Kenai LNG tax
case.
20
<PAGE>
Other consists primarily of the company's insurance operations,
along with income tax items and other items that are not directly
associated with the operating segments on a stand-alone basis.
Other benefited from higher earnings from the company's insurance
operations, along with lower tax accruals not directly associated
with the operating segments.
Special items in the first quarter of 1996 included an after-tax
gain of $565 million related to the favorable settlement of the
company's Kenai LNG tax case. This amount was partially offset
by various contingency accruals. Special items in the first
quarter of 1995 consisted of work force reduction charges.
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-------------------------------
At At At
March 31 December 31 March 31
1996 1995 1995
-------------------------------
Current ratio 1.0 .9 1.0
Long-term debt $2,910 3,097 3,076
Preferred stock of subsidiary $ 345 345 345
Stockholders' equity $3,823 3,188 3,029
Percent of long-term debt
to capital* 41% 47 48
Percent of floating-rate debt
to total debt 17% 22 22
- -----------------------------------------------------------------
*Capital includes long-term debt, preferred stock of subsidiary
and stockholders' equity.
Cash from operations doubled in the first quarter of 1996, up
$355 million, compared with the same period in 1995. The
increase was primarily due to the impact of the favorable
resolution of the Kenai LNG tax proceeding, which resulted in a
$209 million cash refund from the Internal Revenue Service.
Improved operating results and the Kenai 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.
21
<PAGE>
On March 15, 1996, the company replaced an existing bank credit
facility with a new $25 million credit agreement with the Thrift
Plan of Phillips Petroleum Company and Trust to provide short-
term financing to accommodate employee transactions under the
Thrift Plan. The agreement requires no commitment fee;
borrowings are non-interest bearing and must be repaid within
31 days. At March 31, 1996, $19 million was outstanding under
the agreement. The loan was repaid on April 12, 1996.
Capital Expenditures and Investments
Millions of Dollars
-------------------------------------
Three Months Ended
March 31
------------------
Estimated 1996 1996 1995
-------------- ------------------
E&P $1,029 $201 147
GPM 80 13 29
RM&T 204 52 22
Chemicals 240 44 42
Corporate and Other 67 6 8
- -----------------------------------------------------------------
$1,620 $316 248
=================================================================
United States $ 839 $174 152
Foreign 781 142 96
- -----------------------------------------------------------------
$1,620 $316 248
=================================================================
The company's improved operating results and the collection of
part of 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-1980's.
The E&P capital spending program received the biggest increase
from $855 million to $1.029 billion, enabling Phillips to sign an
agreement to purchase a subsidiary of Parker and Parsley
Petroleum Company, which controls a 22.5 percent interest in the
Bayu field, offshore Australia and Indonesia in the Timor Sea.
Phillips and its co-venturers discovered the field early in 1995.
With finalization of the acquisition, Phillips' stake in the
field will increase to 60 percent from 37.5 percent when the
transaction closes, which is expected in May 1996.
Phillips and its co-venturers are evaluating plans to develop the
Bayu field and construct an onshore liquefied natural gas
processing facility, using Phillips' proprietary technology to
liquefy the natural gas. Evaluation of the field continues.
22
<PAGE>
Following a second successful well early in 1996, the drilling of
a third exploratory well, which began in March, encountered
hydrocarbons but was plugged and abandoned. The company plans to
drill a fourth well around mid-year, and a fifth well in the
fourth quarter of 1996.
Capital spending plans for RM&T increased to $204 million from
$175 million, accelerating 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 intends to utilize an
operating lease program to partially support this planned retail
marketing expansion.
The company began its planned expansion of retail marketing
during the first quarter of 1996, with the purchase of 21 retail
outlets, the majority of which are in Albuquerque, New Mexico,
and the Salt Lake City, Utah, region. In the second quarter,
construction is scheduled to begin on four new outlets, and three
existing stations will be razed and rebuilt using the new Kicks
service station-convenience store design.
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), 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 the 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.
Contingencies
Legal and Tax Matters
The company has a number of issues outstanding with the IRS that
can proceed toward final settlement as a result of resolving the
Kenai LNG tax proceeding. Although a favorable resolution of
these issues would have a positive effect on net income and cash
23
<PAGE>
flow, it is too early to determine the outcome, when the issues
will be resolved, or the final financial effects. An unfavorable
outcome of the issues would not impact the company's net income
or cash position.
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.
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 first quarter. Of the 49 sites remaining at
March 31, 1996, the company believes it has a legal defense or
its records indicate no involvement for 12 sites. At six 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.
24
<PAGE>
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 March 31, 1996, accruals of $9 million had been made for the
company's unresolved PRP sites. In addition, the company has
accrued $90 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 $12 million for
other environmental contingent liabilities, for total
environmental accruals of $111 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. 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 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), under long-term take-or-pay gas sales
agreements guaranteed by its parent, Enron Corp. Under the
agreements, EEL is required to pay for gas at a predetermined
rate even if it elects not to take actual deliveries. EEL has
advised that its present non-binding, bona fide estimate of
future total daily nominations for delivery of J-Block gas is
25
<PAGE>
zero through September 1997. The commissioning date of the
facilities and commencement of the periods during which EEL's
obligations to take or pay are yet to be finally determined, and
are the subject of litigation as described below.
In view of EEL's present estimate of takes under the gas sales
agreements, the J-Block owners are actively pursuing alternative
arrangements to commence production. Since liquids production is
dependent on the amount of natural gas that can be produced, the
J-Block owners intend to install gas injection facilities, which
would allow for the production of liquids while the natural gas
production is reinjected for later delivery. The U.K. government
has approved these plans.
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 contract. The J-Block owners are continuing to investigate
transportation, processing and sales of natural gas from this
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 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 agreement 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 agreement. On the same date Enron
Corp., EEL, and Teesside Gas Transportation Limited (TGTL) filed
a lawsuit in district court in Harris County, Texas. That suit
alleges 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 is further alleged 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. The Enron parties also
sought a temporary injunction prohibiting the J-Block owners from
re-injecting gas into the J-Block reservoir or unitizing the
J-Block reservoir. The lawsuit has been removed to the U.S.
District Court in Houston, Texas.
26
<PAGE>
The CATS parties and the J-Block parties filed proceedings in
London requesting an anti-suit injunction against the lawsuit
filed by the Enron parties in Harris County. A temporary
anti-suit injunction was issued by the English High Court on
April 19, 1996, which will temporarily stay the proceedings
pending in Houston. Further hearings on the injunction are
scheduled.
On May 8, 1996, the English High Court ruled in favor of the
J-Block owners on the suit filed March 29, that EEL could not
refuse by virtue of the decline in natural gas prices to agree to
commissioning of the J-Block facilities. Further developments in
all of these pieces of litigation are anticipated, and the course
of events and range of possible outcomes cannot be predicted at
this time. The company intends to continue 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 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.
Also in J-Block, the company drilled and successfully tested the
30/7a-P12 (Jocelyn) well through the Judy subsea template. The
well tested at a rate of 20 million cubic feet of gas per day and
3,800 barrels of condensate per day. The well evaluated a
separate downthrown fault block that is at a greater depth and
has higher pressures and temperatures than the wells drilled in
the Judy field.
Phillips' activity in the subsalt play of the Gulf of Mexico
continues with the discovery at the Agate No. 1 well on Ship
Shoal Block 361. The well tested from two separate zones for a
combined flow rate of 4,100 barrels a day of oil and 24 million
cubic feet a day of gas. Agate is the third field discovery for
Phillips and its co-venturers in the Gulf of Mexico subsalt
trend. Phillips and its co-venturers are evaluating test results
and are considering an appraisal drilling program.
While the Agate well has been suspended for possible future
production, the company is evaluating the feasibility of
producing the Agate field through the Mahogany platform, which
would significantly lower development costs. Following the Agate
discovery, Phillips and its co-venturers announced the
unsuccessful Alexandrite well, also in the Gulf of Mexico subsalt
trend. The well has been plugged and abandoned. Phillips and
27
<PAGE>
its co-venturers will evaluate data from the Alexandrite well and
decide whether to drill a second well. In early May, the company
announced that the Mahogany No. 4 appraisal well in the Mahogany
subsalt field was successful, but will be temporarily abandoned,
to be completed and produced after the installation of the
Mahogany platform this summer.
Phillips plans to expand its chemicals business by entering a new
chemicals business-line--dicyclopentadiene (DCPD)--in 1997. The
company plans to produce about 40 million pounds a year of the
polyester-grade DCPD with the modification and start-up of an
idle hydrotreating unit at the company's Sweeny, Texas, refinery
and petrochemical complex (Sweeny). DCPD, which is used
primarily in a variety of fiberglass-reinforced polyester
products for construction, marine and automotive applications, is
a by-product of ethylene production at Sweeny, where ethylene
capacity is being increased from 3.6 billion to 4.5 billion
pounds a year.
In March 1996, Phillips was granted exclusive rights to evaluate
oil and gas potential in Blocks 17 and 18 along the east coast of
South Africa--an area covering 15 million acres in the Indian
Ocean. During the eight-month term of the agreement, Phillips
will re-process and re-evaluate existing geophysical and
geochemical data, with a view toward applying for oil and gas
exploration rights in these two blocks.
The company announced late in April that the initial well in the
Borj Messouda area of eastern Algeria was unsuccessful. The well
encountered hydrocarbons, but not in commercial amounts so the
well was plugged and abandoned. The company plans to apply what
it learned from this initial well to future drilling
opportunities there. Phillips, which owns 100-percent interest
in the prospect, plans to spud another well late in 1996 or early
1997, and a third well next year.
The company received Norwegian government approval of the farm-in
agreement, where Phillips increased its equity to 12.5 percent
interest in the Siri field, recently discovered in the Danish
sector of the North Sea. The initial well tested at 5,800 gross
barrels of oil per day. The company is working with its
co-venturers to evaluate the feasibility of an appraisal drilling
program.
In early 1996, the company was awarded an 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.
28
<PAGE>
Late in the first quarter, the company installed a fluid
catalytic cracker at its Woods Cross refinery in Utah, which
should provide both economic and environmental benefits. The
unit is expected to increase yields of high-end products, lower
catalyst and maintenance costs, reduce sulfur dioxide emissions
and allow for recycling of spent catalyst. The unit became
operational in April.
In an effort to reduce operating costs and increase the
reliability of steam and electrical supplies, Phillips is in
various stages of pursuing four power co-generation projects.
These electrical and steam generating facilities will be
developed by third party developers to serve the company's
Borger, Sweeny, HCC and Puerto Rico Core facilities.
Phillips' average quarterly worldwide crude oil sales prices
reached their highest level in over three years. If Iraq were to
resume exporting crude oil, without accommodation by reduced
supplies from other countries, prices could soften. Without
Iraq's re-entry into the market, supply/demand should remain
balanced with prices being supported by low global inventories of
crude oil and products.
The company received notice by letter dated May 7, 1996, from the
Antitrust Division of the United States Department of Justice of
the opening by the Division of "an investigation of recent
increases in gasoline prices to determine if those increases were
in any way caused by conduct in violation of the antitrust laws."
The company believes that similar notices have been or are being
sent to other industry participants, but is unable at this time
to assess the impact of the investigation.
In addition to the $565 million benefit to net income recognized
during the first quarter, the favorable resolution of the Kenai
LNG tax case is also expected to benefit the company's 1996 net
operating earnings by an estimated 20 to 25 cents per share, due
to the lower effective tax rate on current Kenai LNG earnings and
lower net interest charges on tax liabilities from prior years.
Cash refunds of about $165 million are expected over the next few
years.
On May 14, 1996, the company announced that it had entered into
exclusive discussions with Conoco Inc., a subsidiary of E. I.
du Pont de Nemours and Company, regarding the possibility of
combining the company's and Conoco's United States refining,
marketing and transportation operations through the formation of
a fifty/fifty joint venture to be owned equally by the company
and Conoco. While the company and Conoco have reached agreement
on the framework for exclusive discussions about a possible
combination of these portions of their respective businesses,
29
<PAGE>
there are substantial issues to be resolved before any agreement
in principle to proceed with such a combination could be reached,
and no assurance can be given, nor should any inference be drawn,
that any such agreement to proceed will in fact be reached.
30
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
12 Computation of Ratio of Earnings to Fixed Charges.
18 Letter from Ernst & Young LLP Regarding Change in
Depreciation Accounting Method.
27 Financial Data Schedule.
Reports on Form 8-K
- -------------------
During the three months ended March 31, 1996, the company did not
file any reports on Form 8-K.
31
<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)
May 14, 1996
32
<PAGE>
Exhibit 12
PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES
TOTAL ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars
---------------------------
Three Months Ended March 31
1996 1995
---------------------------
(Unaudited)
Earnings Available for Fixed Charges
Income before income taxes $881 283
Distributions less than equity in earnings
of less-than-fifty-percent-owned companies 17 (5)
Fixed charges, excluding capitalized
interest and the portion of the
preferred dividend requirements of a
subsidiary not previously deducted
from income* 83 92
- -----------------------------------------------------------------------------
$981 370
=============================================================================
Fixed Charges
Interest and expense on indebtedness,
excluding capitalized interest $ 64 73
Capitalized interest 8 5
Preferred dividend requirements of
a subsidiary 10 21
One-third of rental expense, net of
subleasing income, for operating leases 9 8
- -----------------------------------------------------------------------------
$ 91 107
=============================================================================
Ratio of Earnings to Fixed Charges 10.8 3.5
- -----------------------------------------------------------------------------
*Includes amortization of capitalized interest totaling approximately
$2 million and $3 million in 1996 and 1995, respectively.
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 in the first quarter
of 1995, and included $1 million of interest attributable to the LTSSP
borrowings for the first quarter of 1996.
Exhibit 18
May 10, 1996
Phillips Petroleum Company
Phillips Building
Bartlesville, Oklahoma 74004
Phillips Gas Company
First Interstate Tower, Suite 800
1300 Post Oak Boulevard
Houston, Texas 77056
Notes 2 of Notes to Financial Statements of Phillips Petroleum
Company and Phillips Gas Company included in their Forms 10-Q for
the three month period ended March 31, 1996, describe a change in
the method of accounting for the depreciation of natural gas
plants and systems of Phillips Gas Company, a subsidiary of
Phillips Petroleum Company, from the unit-of-production method to
the straight-line method. You have advised us that you believe
that the change is to a preferable method in your circumstances
because the change better reflects how the assets are expected to
be used over time, provides a better matching of revenues and
expenses, and is consistent with prevalent industry practice.
There are no authoritative criteria for determining a preferable
depreciation method based on the particular circumstances;
however, we conclude that the change in the method of accounting
for the depreciation of natural gas plants and systems is to an
acceptable alternative method which, based on your business
judgment to make this change for the reasons cited above, is
preferable in your circumstances. We have not conducted an audit
in accordance with generally accepted auditing standards of any
financial statements of Phillips Petroleum Company or Phillips
Gas Company as of any date or for any period subsequent to
December 31, 1995, and therefore we do not express any opinion on
any financial statements of Phillips Petroleum Company or
Phillips Gas Company subsequent to that date.
Very truly yours,
/s/ Ernst & Young LLP
-----------------
Ernst & Young LLP
Tulsa, Oklahoma
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Phillips Petroleum Company as of March 31, 1996,
and the related consolidated statement of income for the three-month period
ended March 31, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 164
<SECURITIES> 0
<RECEIVABLES> 1,640
<ALLOWANCES> 17
<INVENTORY> 472
<CURRENT-ASSETS> 2,452
<PP&E> 19,273
<DEPRECIATION> 10,734
<TOTAL-ASSETS> 12,236
<CURRENT-LIABILITIES> 2,472
<BONDS> 2,910
0
0
<COMMON> 585
<OTHER-SE> 3,238
<TOTAL-LIABILITY-AND-EQUITY> 12,236
<SALES> 3,595
<TOTAL-REVENUES> 3,602
<CGS> 3,033<F1>
<TOTAL-COSTS> 3,225<F2>
<OTHER-EXPENSES> 8<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> 881
<INCOME-TAX> 186
<INCOME-CONTINUING> 695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 695
<EPS-PRIMARY> 2.65
<EPS-DILUTED> 2.65
<FN>
<F1>Purchased crude oil and products + Production and operating expenses +
Exploration expenses + Depreciation, depletion and amortization.
<F2>CGS + Selling, general and administrative expenses + Taxes other than income
taxes.
<F3>Preferred dividend requirements of subsidiary.
</FN>
</TABLE>
