UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- --------------------
Commission file number 1-720
-----------------------------------------------------
PHILLIPS PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-0400345
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Phillips Building, Bartlesville, Oklahoma 74004
(Address of principal executive offices) (Zip Code)
918-661-6600
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The registrant had 263,153,065 shares of common stock, $1.25 par value,
outstanding at October 31, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
---------------------------------
Three Months Nine Months
Ended Ended
September 30 September 30
---------------------------------
1997 1996* 1997 1996*
---------------------------------
Revenues
Sales and other operating revenues $3,844 3,852 11,497 11,384
Equity in earnings of affiliated
companies 33 22 98 42
Other revenues 18 23 57 48
- ---------------------------------------------------------------------
Total Revenues 3,895 3,897 11,652 11,474
- ---------------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 2,272 2,429 6,955 7,171
Production and operating expenses 561 515 1,613 1,527
Exploration expenses 44 46 159 159
Selling, general and
administrative expenses 171 131 467 392
Depreciation, depletion and
amortization 250 205 622 633
Taxes other than income taxes 65 69 201 201
Interest expense 50 53 153 171
Preferred dividend requirements
of subsidiary and capital trusts 21 14 62 32
- ---------------------------------------------------------------------
Total Costs and Expenses 3,434 3,462 10,232 10,286
- ---------------------------------------------------------------------
Income before income taxes and
Kenai LNG tax settlement 461 435 1,420 1,188
Kenai LNG tax settlement 5 - 81 571
- ---------------------------------------------------------------------
Income before income taxes 466 435 1,501 1,759
Provision for income taxes 250 248 751 656
- ---------------------------------------------------------------------
Net Income $ 216 187 750 1,103
=====================================================================
Per Share of Common Stock
Net Income $ .82 .71 2.85 4.20
Dividends Paid $ .34 .32 1.00 .93
- ---------------------------------------------------------------------
Average Common Shares Outstanding
(in thousands) 263,503 263,180 263,459 262,814
- ---------------------------------------------------------------------
See Notes to Financial Statements.
*Reclassified to conform to current presentation.
1
<PAGE>
- ------------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
--------------------------
September 30 December 31
1997 1996
-------------------------
Assets
Cash and cash equivalents $ 899 615
Accounts and notes receivable (less
allowances: 1997--$20; 1996--$20) 1,780 1,988
Inventories 565 472
Deferred income taxes 121 117
Prepaid expenses and other current assets 121 114
- ------------------------------------------------------------------
Total Current Assets 3,486 3,306
Investments and long-term receivables 964 912
Properties, plants and equipment (net) 9,548 9,120
Deferred income taxes 81 85
Deferred charges 137 125
- ------------------------------------------------------------------
Total $14,216 13,548
==================================================================
Liabilities
Accounts payable $ 1,590 1,793
Notes payable and long-term debt due
within one year 352 574
Dividends payable 6 -
Accrued income and other taxes 580 483
Other accruals 295 287
- ------------------------------------------------------------------
Total Current Liabilities 2,823 3,137
Long-term debt 2,507 2,555
Accrued dismantlement, removal and
environmental costs 749 783
Deferred income taxes 1,186 1,047
Employee benefit obligations 411 425
Other liabilities and deferred credits 819 700
- ------------------------------------------------------------------
Total Liabilities 8,495 8,647
- ------------------------------------------------------------------
Preferred Stock of Subsidiary and Other
Minority Interests 350 350
- ------------------------------------------------------------------
Company-Obligated Mandatorily
Redeemable Preferred Securities
of Phillips Capital Trusts I and II 650 300
- ------------------------------------------------------------------
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 2,028 1,999
Treasury stock (at cost:
1997--13,600,508 shares;
1996--13,878,480 shares) (733) (757)
Compensation and Benefits Trust (CBT)
(at cost: 29,200,000 shares) (989) (989)
Foreign currency translation adjustments 8 54
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (351) (378)
Retained earnings 4,375 3,939
- ------------------------------------------------------------------
Total Common Stockholders' Equity 4,721 4,251
- ------------------------------------------------------------------
Total $14,216 13,548
==================================================================
See Notes to Financial Statements.
2
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Nine Months Ended
September 30
-------------------
1997 1996*
-------------------
Cash Flows from Operating Activities
Net income $ 750 1,103
Adjustments to reconcile net income to net
cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 622 633
Dry hole costs and leasehold
impairment 57 63
Deferred taxes 196 138
Tax settlement receivable - (176)
J-Block settlement 161 -
Other 56 (30)
Working capital adjustments
Decrease in aggregate balance of
accounts receivable sold - (200)
Decrease in other accounts and
notes receivable 193 11
Increase in inventories (97) (2)
Decrease (increase) in prepaid
expenses and other current assets (9) 7
Decrease in accounts payable (199) (6)
Increase (decrease) in taxes and
other accruals 128 (114)
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 1,858 1,427
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments,
including dry hole costs (1,277) (1,060)
Proceeds from asset dispositions 19 84
Long-term advances to affiliates and
other investments (21) (58)
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (1,279) (1,034)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Repayment of debt (270) (239)
Purchase of common stock (21) -
Issuance of company stock 18 21
Issuance of company-obligated mandatorily
redeemable preferred securities 350 300
Dividends paid on common stock (263) (244)
Other (109) 48
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (295) (114)
- -----------------------------------------------------------------
Increase in Cash and Cash Equivalents 284 279
Balance at beginning of period 615 67
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 899 346
=================================================================
See Notes to Financial Statements.
*Reclassified to conform to current presentation.
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 Policies for Derivative Instruments
Forward foreign currency contracts designated and effective as
hedges of firm commitments, commodity futures and commodity
option contracts designated and effective as hedges are recorded
at market value, either through monthly adjustments for
unrealized gains and losses (forwards and options) or through
daily settlements in cash (futures), and the resulting gains and
losses are deferred. Forward foreign currency contracts
designated and effective as hedges of existing assets and
liabilities are recorded at market value through monthly
adjustments, with immediate recognition of the resulting gains
and losses. Commodity swaps and forward commodity contracts
designated as hedges are not recorded until the resulting cash
flows are known. The gains and losses from all of these
derivative instruments are recognized during the same period in
which the gains and losses from the underlying exposures being
hedged are recognized, except for gains and losses from hedges of
asset acquisitions which are reported as adjustments to the
carrying value of the assets.
In accordance with company risk-management policies, any
derivative instrument held by the company must relate to an
underlying, offsetting position, probable anticipated transaction
or firm commitment. Additionally, the hedging instrument used
must be expected to be highly effective in achieving market value
changes that offset the opposing market value changes of the
underlying transaction. If an existing derivative position is
terminated prior to expected maturity or re-pricing, any deferred
or resultant gain or loss will continue to be deferred unless the
underlying position has ceased to exist. Deferred gains and
losses, deferred premiums paid for forward exchange contracts,
and deferred premiums paid for commodity option contracts are
reported on the balance sheet with other current assets or other
4
<PAGE>
current accruals. Gains and losses from derivatives designated
as hedges of sales are reported on the statement of income with
sales and other operating revenues, whereas gains and losses from
derivatives designated as hedges of commodity purchases are
reported with purchased crude oil and products or with production
and operating expenses, subject to the effects of any related
inventory costing reflected on the balance sheet. Gains and
losses from hedging feedstock-to-product margins are reported
with purchased crude oil and products. Recognized gains and
losses are reported on the statement of cash flows in a manner
consistent with the underlying position being hedged.
Note 3--Inventories
Inventories consisted of the following:
Millions of Dollars
-------------------------
September 30 December 31
1997 1996
-------------------------
Crude oil and petroleum products $246 136
Chemical products 230 255
Materials, supplies and other 89 81
- -----------------------------------------------------------------
$565 472
=================================================================
Note 4--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Millions of Dollars
-------------------------
September 30 December 31
1997 1996
-------------------------
Properties, plants and equipment
(at cost) $20,839 20,103
Less accumulated depreciation,
depletion and amortization 11,291 10,983
- -----------------------------------------------------------------
$ 9,548 9,120
=================================================================
Note 5--Impairments
Due to a downward revision in gas reserves for Garden Banks
Blocks 70/71 in the Gulf of Mexico, a $25 million after-tax
impairment was taken in September 1997 to reduce the net book
value of the field to its estimated fair market value. The fair
market value of this Exploration and Production asset was
determined using the present value of expected future cash flows,
resulting in a before-tax charge of $39 million to depreciation,
depletion and amortization expense.
5
<PAGE>
Note 6--Debt
During the first nine months of 1997, Phillips increased its
revolving bank credit facility from $1.1 billion to $1.5 billion.
The company's commercial paper program is supported by this
credit facility in an amount equal to 100 percent of the
commercial paper outstanding. The commercial paper program was
raised from $250 million to $1.5 billion this year. At
September 30, 1997, no amount was outstanding under either
facility. The company also amended the LTSSP $397 million
25-year term bank loan to extend the date that any participating
bank in the syndicate of lenders may cease to participate--from
November 30, 2001, to December 5, 2004.
Effective September 23, 1997, the company's wholly owned
subsidiary, Phillips Petroleum Company Norway, refinanced its
$300 million revolving credit facility, maturing in 2001, to
secure more favorable interest rates. The committed amount and
term remained unchanged. No amounts were outstanding under this
facility at September 30, 1997.
The company's $300 million 9 1/2 % Notes due 1997 will mature
November 15, 1997.
Note 7--Kenai LNG Tax Settlement
On February 26, 1996, the U.S. Tax Court's previous decisions
relating 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 nine-month period ended September 30, 1996, by
$565 million.
Final resolution of all outstanding issues with the Internal
Revenue Service (IRS) was achieved for years 1983 through 1986.
Refunds, including interest, of $107 million, primarily relating
to the company's sales of LNG from its Kenai, Alaska, facility,
increased net income for the nine-month period ended
September 30, 1997, by $83 million. The company also has a
number of issues outstanding with the IRS related to tax years
1987 through 1992, further discussed in Note 10--Contingencies.
6
<PAGE>
Note 8--Income Taxes
The company's effective tax rates for the third quarter and the
first nine months of 1997 were 54 and 50 percent, respectively,
compared with 57 and 37 percent for the same periods a year ago.
The decrease for the third quarter was due mainly to the mix of
income in the various taxing jurisdictions. Excluding the effect
of the favorable resolution of the Kenai LNG tax litigation and
of the outstanding issues with the IRS for 1983 through 1986 as
discussed in Note 7, the effective tax rates for the third
quarter and first nine months of 1997 would have been 54 and
53 percent, respectively, compared with 57 and 55 percent for the
prior year.
Note 9--J-Block Settlement
On June 2, 1997, Phillips Petroleum Company United Kingdom
Limited and its co-venturers, Agip (U.K.) Limited and BG
Exploration and Production Limited reached a settlement with
Enron Europe Limited (Enron) concerning J-Block gas production in
the U.K. sector of the North Sea. Under the terms of the
settlement agreement, Enron made an immediate cash payment of
$440 million to the J-Block owners; the existing take-or-pay
depletion contract was amended to become a firm long-term supply
contract; and the fixed contract price for J-Block gas was
reduced to reflect current market conditions for long-term gas
sales contracts. The total contract gas quantity, however,
remains essentially the same. Phillips' share of the
$440 million cash payment was $161 million. The settlement
concluded all J-Block litigation with Enron. The income
associated with the cash payment will be recognized over the
remaining term of the supply contract.
Note 10--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.
7
<PAGE>
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
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--The company has a number of issues outstanding with the IRS
related to tax years 1987 through 1992 that are expected to be
resolved in the near term as a result of resolving the Kenai LNG
tax case. Although it is too early to determine the financial
effects, 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.
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.
8
<PAGE>
Note 11--Company-Obligated Mandatorily Redeemable Preferred
Securities of Phillips Capital Trusts
On January 17, 1997, Phillips 66 Capital II (Trust II) completed
a $350 million underwritten public offering of 350,000 shares of
8% Capital Securities (Capital Securities). The sole asset of
Trust II is $361 million of the company's 8% Junior Subordinated
Deferrable Interest Debentures due 2037 (Subordinated Debt
Securities) purchased by Trust II on January 17, 1997. The
Subordinated Debt Securities are unsecured obligations of
Phillips, subordinate and junior in right of payment to all
present and future senior indebtedness of Phillips, but equal in
right of payment with Phillips' 8.24% Junior Subordinated
Deferrable Interest Debentures due 2036, issued in 1996. The
Subordinated Debt Securities are due January 15, 2037, and are
redeemable in whole, or in part, at the option of Phillips, on or
after January 15, 2007. When the company redeems the
Subordinated Debt Securities, Trust II is required to apply all
redemption proceeds to the immediate redemption of the Trust's
Capital Securities. Phillips fully and unconditionally
guarantees Trust II's obligations under the securities.
The Capital Securities are accounted for and reported in the
company's financial disclosures in the same manner as the
8.24% Trust Originated Preferred Securities issued by
Phillips Capital Trust I in 1996.
Note 12--Cash Flow Information
Cash payments and non-cash investing and financing activities for
the nine-month periods ended September 30 were as follows:
Millions of Dollars
-------------------
1997 1996*
-------------------
Cash payments
Interest
Debt $155 163
Taxes and other 16 26
- -----------------------------------------------------------------
$171 189
=================================================================
Income taxes $449 482
- -----------------------------------------------------------------
*Reclassified to conform to current presentation.
9
<PAGE>
Note 13--Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, "Earnings per Share." The overall
objective of Statement No. 128 is to simplify the calculation of
earnings per share (EPS) and achieve comparability with
international accounting standards. FASB Statement No. 128
requires companies to adopt its provisions for fiscal years
ending after December 15, 1997, and requires restatement of all
prior period EPS data presented. Earlier application is not
permitted. Statement No. 128 replaces the presentation of
primary and fully diluted EPS with a presentation of basic and
diluted EPS on the face of the income statement. Basic EPS will
be calculated by dividing income available to common stockholders
by the weighted-average common shares outstanding. Fully diluted
EPS will not change significantly but has been renamed diluted
EPS. Income available to common stockholders and the weighted-
average common shares outstanding will be adjusted for the
assumed conversion of all potentially dilutive securities
(options, warrants, and convertible debt). The pro forma EPS
data for the three- and nine-month periods ended September 30,
1997 and 1996, follows:
1997 1996
------------------------- -------------------------
Average Average
Common Shares Common Shares
Outstanding Earnings Outstanding Earnings
(in thousands) Per Share (in thousands) Per Share
-------------- --------- -------------- ---------
Three Months
Basic EPS
(same as
reported) 263,503 $ .82 263,180 $ .71
Diluted EPS 265,784 .81 265,437 .70
- -----------------------------------------------------------------
Nine Months
Basic EPS
(same as
reported) 263,459 2.85 262,814 4.20
Diluted EPS 265,419 2.82 264,758 4.16
- -----------------------------------------------------------------
Note 14--Subsequent Events
On October 30, 1997, the Board of Directors of Phillips Gas
Company (PGC) approved the redemption on December 15, 1997, of
its Series A 9.32% Cumulative Preferred Stock, PGC's only class
of publicly held stock. The total issue of 13.8 million shares
will be redeemed at par, or $25 per share, plus accrued dividends
of $.2006 per share. PGC has given notice to the New York Stock
Exchange of the redemption, and as a result of such notice,
trading in the preferred stock will cease as of the close of
10
<PAGE>
business Eastern Standard Time on December 12, 1997, when the
transfer books are closed. The $348 million required for the
stock redemption will be provided by a loan from a subsidiary of
Phillips Petroleum Company to PGC. Phillips owns 100 percent of
PGC's common stock outstanding.
During second quarter 1997, the company announced a stock
repurchase program which authorizes the company to expend up to
$150 million to repurchase shares of the company's common stock
through December 31, 1999. Through October 31, 1997,
1,043,600 shares had been repurchased for approximately
$48 million. In conjunction with the repurchase program, in
October 1997 the company issued put options on a notional
400,000 shares of the company's common stock at an exercise price
of $45 per share. If the put options have intrinsic value on
their specific maturity dates in 1998, the company can elect
between physical settlement, net share settlement, or net cash
settlement with the purchaser of the options.
11
<PAGE>
- -----------------------------------------------------------------
Management's Discussion and Phillips Petroleum Company
Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis contains forward-looking
statements including, without limitation, statements relating to
the company's plans, strategies, objectives, expectations,
intentions, and adequate resources, and are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The words "forecasts," "intends,"
"possible," "potential," "targeted," "believe," "expect," "plan,"
or "plans," "scheduled," "perceives," "anticipate," "estimate,"
"begin," and similar expressions identify forward-looking
statements. The company does not undertake to update, revise or
correct any of the forward-looking information. Readers are
cautioned that such forward-looking statements should be read in
conjunction with the company's disclosures under the heading:
"CAUTIONARY STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR'
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995" beginning on page 40.
RESULTS OF OPERATIONS
Unless otherwise noted, discussion of results for the three- and
nine-month periods ending September 30, 1997, are based on a
comparison with the corresponding periods in 1996.
A summary of the company's net income, by business segment and
consolidated, follows:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996* 1997 1996*
------------------ -----------------
Exploration and Production
(E&P) $122 137 448 365
Gas Gathering, Processing
and Marketing (GPM) 25 31 75 87
Refining, Marketing and
Transportation (RM&T) 63 35 130 79
Chemicals 79 49 226 197
Corporate and Other (73) (65) (129) 375
- -----------------------------------------------------------------
Net Income $216 187 750 1,103
=================================================================
*Restated to reflect the transfer of the company's wholesale
propane business from RM&T to Chemicals. In addition, certain
costs previously held at Corporate are now aligned with the
operating segments.
12
<PAGE>
Consolidated Results
Net income included the following special items on an after-tax
basis:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
------------------ -----------------
Property impairments $(25) (25) (36) (70)
Kenai LNG tax settlement 3 - 83 565
Net gain on asset sales - 9 7 14
Foreign currency gains
(losses) (12) 2 (26) 2
Pending claims and
settlements 2 (13) 18 (42)
Other items 1 6 (4) (5)
- -----------------------------------------------------------------
Total special items $(31) (21) 42 464
=================================================================
Excluding the special items above, net operating income was
$247 million for the three-month period ended September 30, 1997,
compared with $208 million for the same period last year. For
the nine-month period ended September 30, 1997, net operating
income was $708 million, compared with $639 million for the
corresponding nine-month period a year ago. The results for the
third quarter marked the seventh consecutive quarter in which net
operating income exceeded $200 million.
RM&T had an especially strong performance in the third quarter,
with net operating income more than double that of the third
quarter a year ago. Chemicals' net operating income increased
45 percent in the quarter, while E&P's and GPM's decreased
8 percent and 17 percent, respectively.
13
<PAGE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
Phillips at a Glance 1997 1996 1997 1996
------------------ -----------------
U.S. crude oil
production (MBD) 65 68 67 70
Worldwide crude oil
production (MBD) 244 213 230 218
U.S. natural gas
production (MMCFD) 1,014 1,105 1,040 1,107
Worldwide natural gas
production (MMCFD) 1,474 1,447 1,465 1,513
Worldwide natural gas
liquids production (MBD) 173 166 168 162
Liquefied natural gas
sales (MMCFD) 114 144 115 130
Refinery utilization
rate (%) 101 100 93 94
U.S. automotive gasoline
sales (MBD) 344 349 343 339
U.S. distillates
sales (MBD) 138 135 130 135
Worldwide petroleum
products sales (MBD) 700 685 692 688
Natural gas liquids
processed (MBD) 213 202 206 202
Ethylene
production (MMlbs)* 838 549 2,288 1,862
Polyethylene
production (MMlbs)* 503 529 1,486 1,546
Polypropylene
production (MMlbs)* 100 90 326 232
Paraxylene
production (MMlbs) 195 129 353 455
- -----------------------------------------------------------------
*Includes Phillips' share of equity affiliates' production.
Income Statement Analysis
Sales and other operating revenues declined marginally in the
third quarter of 1997, but increased slightly in the nine-month
period. In both periods, revenues from the company's Chemicals
operations were higher, primarily as a result of higher sales
volumes. Revenues from natural gas sales also increased, due to
higher sales prices. Offsetting these increases were lower
revenues from the sale of crude oil and petroleum products.
Equity in earnings of affiliated companies increased 50 percent
in the third quarter of 1997 and 133 percent in the 1997
nine-month period. Increased equity earnings from the company's
14
<PAGE>
interest in the Sweeny Olefins Limited Partnership (SOLP), due to
higher ethylene margins and sales volumes, substantially
benefited both periods. Lower earnings from the company's
plastics equity companies in both periods partially offset the
gains at SOLP. In addition, a first quarter 1996 investment
impairment related to Point Arguello equity companies affected
the comparison between the nine-month periods.
Other revenues decreased 22 percent in the third quarter of 1997,
while increasing 19 percent in the first nine months of 1997. In
the quarter, higher interest income in 1997 due to higher cash
balances was more than offset by gains from assets sales in the
third quarter of 1996. The 1997 nine-month period benefited from
higher interest income as a result of higher cash balances.
Purchase costs decreased 6 and 3 percent in the third quarter and
first nine months of 1997, respectively. In both periods, crude
oil purchases decreased as a result of lower trading volumes and
prices. Partially offsetting this decrease were higher purchases
in the Chemicals segment, as well as higher purchases of
petroleum products.
Controllable costs, primarily production and operating expenses
and selling, general and administrative expenses, after adjustment
for special items, increased 10 and 9 percent in the third quarter
and nine-month period of 1997, respectively. In both periods,
expenses were higher due to increased production costs associated
with new volumes from expansions in Chemicals and production from
E&P's J-Block in the U.K. sector of the North Sea, higher
expenses associated with the company's worldwide growth
initiatives, higher maintenance expenses, increased well workover
costs, and higher fuel-gas costs.
Exploration expenses were 4 percent lower in the third quarter of
1997, primarily reflecting dry hole costs this year that were
lower than dry hole expenses in the third quarter of 1996. For
the nine-month period of 1997, exploration expenses were
unchanged.
After adjusting for special items, depreciation, depletion and
amortization (DD&A) increased 17 percent in the third quarter of
1997, and 4 percent in the first nine months of 1997. DD&A
related to E&P's J-Block, which came online in mid-1997, was
primarily responsible for the increase in both periods. Special
items included E&P impairments in the Gulf of Mexico and the U.K.
North Sea in 1997, and Point Arguello, offshore California, and
Canada in 1996.
15
<PAGE>
Taxes other than income taxes decreased 6 percent in the third
quarter of 1997, and were unchanged in the year-to-date period.
In the quarter, expenses were lower as a result of a 1996 third
quarter Nigerian education tax assessment, while in the
nine-month period this was offset by higher production taxes in
1997.
Interest expense decreased 6 percent in the third quarter of 1997
and 11 percent in the first nine months. Both periods benefited
from lower average debt levels and higher capitalized interest in
1997. Preferred dividend requirements were higher in both
periods in 1997, as a result of the issuance of mandatorily
redeemable preferred securities in May 1996 and January 1997.
Segment Results
E&P
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996* 1997 1996*
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $122 137 448 365
Less special items (24) (21) (26) (85)
- -----------------------------------------------------------------
Net operating income $146 158 474 450
=================================================================
*Restated to reflect that certain costs previously held at
Corporate are now aligned with the operating segments.
Dollars Per Unit
--------------------------------------
Average Sales Prices
Crude oil (per barrel)
United States $16.19 19.21 17.64 18.12
Foreign 18.51 21.13 19.13 19.93
Worldwide 17.92 20.54 18.72 19.36
Natural gas--lease (per
thousand cubic feet)
United States 2.15 1.96 2.22 1.93
Foreign 2.39 2.54 2.58 2.49
Worldwide 2.25 2.14 2.36 2.11
- -----------------------------------------------------------------
Millions of Dollars
--------------------------------------
Worldwide Exploration Expenses
Geological and geophysical $32 32 95 90
Leasehold impairment 6 6 17 20
Dry holes 3 6 40 43
Lease rentals 3 2 7 6
- -----------------------------------------------------------------
$44 46 159 159
=================================================================
16
<PAGE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
------------------ -----------------
Thousands of Barrels Daily
--------------------------------------
Operating Statistics
Crude Oil Produced
United States 65 68 67 70
Norway 108 96 105 98
United Kingdom 26 5 14 6
Nigeria 25 25 24 25
China 16 14 16 14
Canada 4 5 4 5
- -----------------------------------------------------------------
244 213 230 218
=================================================================
Natural Gas Liquids Produced
United States 4 4 4 4
Norway 8 7 7 8
Other areas 3 3 3 3
- -----------------------------------------------------------------
15 14 14 15
=================================================================
Millions of Cubic Feet Daily
--------------------------------------
Natural Gas Produced
United States (less gas
equivalent of liquids
shown above) 1,014 1,105 1,040 1,107
Norway* 288 242 285 284
United Kingdom* 120 48 92 69
Canada 52 52 48 53
- -----------------------------------------------------------------
1,474 1,447 1,465 1,513
=================================================================
*Dry basis.
Liquefied Natural Gas
Sales 114 144 115 130
- -----------------------------------------------------------------
E&P's net operating income decreased 8 percent in the third
quarter of 1997, primarily due to lower crude oil sales prices,
partially offset by new production volumes from J-Block in the
U.K. North Sea and higher natural gas sales prices. For the
nine-month period of 1997, net operating income increased
5 percent, with higher natural gas sales prices and new
production from J-Block being partially offset by lower crude oil
sales prices, and lower U.S. natural gas production.
Phillips' worldwide crude oil sales price averaged $17.92 per
barrel in the third quarter of 1997, a slight increase from the
second quarter of this year, but still lower than the strong
year-ago levels. While industry crude prices had softened
through the first six months of 1997, they were supported in the
third quarter by improved refining margins, unanticipated
industry supply reductions and tight inventory levels.
17
<PAGE>
U.S. E&P
- --------
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996* 1997 1996*
------------------ -----------------
Operating Income
Reported net income $ 52 111 269 249
Less special items (25) 2 (11) (62)
- -----------------------------------------------------------------
Net operating income $ 77 109 280 311
=================================================================
*Restated to reflect that certain costs previously held at
Corporate are now aligned with the operating segments.
Net operating income from the company's U.S. E&P operations
declined 29 percent in the third quarter of 1997, reflecting
lower crude oil and liquefied natural gas (LNG) revenues and
higher lifting costs. Crude oil revenues were lower primarily
due to a lower average sales price, while LNG revenues declined
as a result of the timing of tanker deliveries within the
quarter. Lifting costs were higher in the 1997 quarter as a
result of increased well workover activity.
In the nine-month period of 1997, net operating income decreased
10 percent. Higher lease gas sales prices were more than offset
by lower crude oil and lease gas production, higher lifting
costs, and slightly lower demand for LNG in Japan.
U.S. crude oil production averaged 65,000 barrels per day in the
third quarter of 1997, 4 percent lower than the third quarter of
1996. The decrease was primarily attributable to field declines
at Prudhoe Bay, Alaska; Point Arguello, offshore California; and
South Marsh Island Blocks 146/147, Gulf of Mexico; partially
offset by new production from the Mahogany subsalt field, Gulf of
Mexico; and increased production from Lake Washington, onshore
Louisiana.
U.S. natural gas production was 8 percent lower in the third
quarter of 1997, primarily due to lower production from Garden
Banks Blocks 70/71 in the Gulf of Mexico, normal field declines
and asset dispositions. A well in the Garden Banks field was
shut-in during the quarter due to a well workover.
Special items in the third quarter of 1997 consisted primarily of
an after-tax charge of $25 million for an impairment of Garden
Banks Blocks 70/71 in the Gulf of Mexico. In addition, the first
nine months of 1997 included a net after-tax gain on asset sales
of $7 million and a reversal of a contingent liability of
$7 million after-tax. Special items in the first nine months of
1996 included an after-tax charge of $45 million for the
impairment of the Point Arguello field and associated assets,
along with various contingency accruals.
18
<PAGE>
Foreign E&P
- -----------
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996* 1997 1996*
------------------ -----------------
Operating Income
Reported net income $ 70 26 179 116
Less special items 1 (23) (15) (23)
- -----------------------------------------------------------------
Net operating income $ 69 49 194 139
=================================================================
*Restated to reflect that certain costs previously held at
Corporate are now aligned with the operating segments.
Net operating income from the company's foreign E&P operations
increased 41 and 40 percent in the third quarter and nine-month
period of 1997, respectively. Both periods benefited from new
production from the J-Block field in the U.K. sector of the North
Sea, as well as higher production volumes from Norway, partly
offset by lower crude oil prices. In addition, the increase in
the year-to-date period reflected higher average natural gas
sales prices.
Foreign crude oil production increased 23 percent in the third
quarter of 1997, while foreign natural gas production increased
35 percent. Both production increases are attributable to new
production from J-Block, and, to a lesser extent, higher
production from the Norwegian North Sea.
Special items in the first nine months of 1997 primarily included
a property impairment of two U.K. North Sea fields totaling
$11 million, after-tax, as well as foreign currency losses.
Special items in the third quarter and nine-month period of 1996
primarily consisted of an impairment of certain Canadian proved
properties totaling $25 million after-tax.
19
<PAGE>
GPM
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996* 1997 1996*
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $25 31 75 87
Less special items - 1 9 3
- -----------------------------------------------------------------
Net operating income $25 30 66 84
=================================================================
*Restated to reflect that certain costs previously held at
Corporate are now aligned with the operating segments.
Dollars Per Unit
--------------------------------------
Average Sales Prices
U.S. residue gas (per
thousand cubic feet) $ 2.18 2.04 2.28 2.05
U.S. natural gas liquids
(per barrel--
unfractionated) 12.39 14.05 12.71 12.93
- -----------------------------------------------------------------
Millions of Cubic Feet Daily
--------------------------------------
Operating Statistics
Natural Gas Purchases
Outside Phillips 1,389 1,391 1,371 1,369
Phillips 159 179 159 179
- -----------------------------------------------------------------
1,548 1,570 1,530 1,548
=================================================================
Raw Gas Throughput 1,973 1,930 1,995 1,920
- -----------------------------------------------------------------
Residue Gas Sales
Outside Phillips 997 1,001 995 998
Phillips 57 72 55 80
- -----------------------------------------------------------------
1,054 1,073 1,050 1,078
=================================================================
Thousands of Barrels Daily
--------------------------------------
Natural Gas Liquids Net
Production
From Phillips E&P
leasehold gas 15 18 15 17
From gas purchased
outside Phillips 143 134 139 130
- -----------------------------------------------------------------
158 152 154 147
=================================================================
GPM's net operating income declined 17 percent in the third
quarter of 1997, and 21 percent in the nine-month period. In the
quarter, lower natural gas liquids (NGL) sales prices were
partially offset by higher residue gas sales prices. For the
year-to-date period, higher residue gas sales prices were more
than offset by higher gas purchase costs and lower residue gas
sales volumes.
20
<PAGE>
Average NGL sales prices in the third quarter of 1997 were
12 percent lower than the third quarter a year ago, but 8 percent
improved over the second quarter of this year. NGL sales volumes
have increased primarily as a result of acquisitions and improved
operating consistency.
Residue gas prices strengthened in the third quarter, with the
largest gains in September. After beginning July and August
below corresponding 1996 levels, prices moved strongly above
September 1996 levels. Moderate demand growth supported the
increased prices. GPM's residue gas sales volumes were down
slightly in the third quarter, resulting primarily from field
declines in the Austin Chalk area of south central Texas.
Special items in the nine-month period of 1997 consisted of a
settlement of a dispute with a producer. Special items in the
1996 nine-month period primarily represented a gain on the sale
of an NGL plant and gathering system.
21
<PAGE>
RM&T
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996* 1997 1996*
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $63 35 130 79
Less special items - 5 (1) 4
- -----------------------------------------------------------------
Net operating income $63 30 131 75
=================================================================
Dollars Per Unit
--------------------------------------
Average Sales Prices
(per gallon)
Automotive gasoline--
wholesale $.68 .67 .68 .65
Automotive gasoline--
retail .83 .82 .83 .81
Distillates .56 .63 .60 .61
- -----------------------------------------------------------------
Thousands of Barrels Daily
--------------------------------------
Operating Statistics
U.S. Refinery Crude Oil
Rated capacity 345 345 345 345
Crude runs 347 345 320 325
Capacity utilization
(percent) 101% 100 93 94
- -----------------------------------------------------------------
Petroleum Products Outside
Sales
United States
Automotive gasoline--
wholesale 292 296 293 290
Automotive gasoline--
retail 38 37 37 37
Aviation fuels 30 26 28 25
Distillates 138 135 130 135
Other products 15 14 13 15
- -----------------------------------------------------------------
513 508 501 502
Foreign 45 44 44 46
- -----------------------------------------------------------------
558 552 545 548
=================================================================
*Restated to reflect the transfer of the company's wholesale
propane business from RM&T to Chemicals. In addition, certain
costs previously held at Corporate are now aligned with the
operating segments.
Sustaining an improvement that began in the second quarter of
1997, RM&T's net operating income more than doubled in the third
quarter of 1997, compared with the third quarter a year ago.
Improved refinery results, primarily due to higher gasoline
margins, drove the strong performance. Although the company's
average wholesale gasoline sales price increased only slightly in
22
<PAGE>
the third quarter, crude oil acquisition costs were 14 percent
lower, leading to improved margins.
RM&T's net operating income increased 75 percent in the
nine-month period of 1997. In addition to higher gasoline
margins, other refinery products margins were higher, partially
offset by higher controllable costs, reflecting higher utilities,
maintenance and advertising expenses.
The company's refineries ran exceptionally well during the
quarter, ending with a third quarter crude oil utilization rate
of 101 percent of rated capacity. The crude oil capacity
utilization rate is expected to decrease in the fourth quarter,
due to a scheduled turnaround at the Sweeny refinery.
Special items in the first nine months of 1997 included certain
costs associated with a power outage at the Sweeny refinery.
Special items in the third quarter of 1996 represented a gain on
the sale of the company's retail propane business. In addition,
the nine-month period of 1996 included costs related to property
damage caused by equipment failure at the Sweeny refinery.
23
<PAGE>
Chemicals
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996* 1997 1996*
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $ 79 49 226 197
Less special items 8 - 7 (7)
- -----------------------------------------------------------------
Net operating income $ 71 49 219 204
=================================================================
Millions of Pounds
Except as Indicated
--------------------------------------
Operating Statistics
Production**
Ethylene 838 549 2,288 1,862
Polyethylene 503 529 1,486 1,546
Propylene 131 81 359 294
Polypropylene 100 90 326 232
Paraxylene 195 129 353 455
Cyclohexane (millions
of gallons) 41 41 115 126
- -----------------------------------------------------------------
**Includes Phillips' share of equity affiliates' production.
Thousands of Barrels Daily
--------------------------------------
U.S. Petroleum Products
Outside Sales
Automotive gasoline 14 16 13 12
Liquefied petroleum gas 98 83 100 97
Other products 30 34 34 31
- -----------------------------------------------------------------
142 133 147 140
=================================================================
Natural Gas Liquids
Processing capacity 250 250 250 250
Liquids processed 213 202 206 202
- -----------------------------------------------------------------
*Restated to reflect the transfer of the company's wholesale
propane business from RM&T to Chemicals. In addition, certain
costs previously held at Corporate are now aligned with the
operating segments.
Chemicals' net operating income increased 45 percent in the third
quarter of 1997, primarily on the strength of higher ethylene
margins and sales volumes. Industry outages and scheduled
turnarounds kept the ethylene supply/demand balance tight during
the third quarter. The third quarter's results also benefited
from improved polyethylene margins, partially offset by lower
equity earnings from the company's interest in a polypropylene
facility at the Houston Chemical Complex, due to lower
polypropylene margins.
24
<PAGE>
Net operating income increased 7 percent in the nine-month period
of 1997. Higher ethylene margins and volumes and higher
polyethylene margins were mostly offset by lower margins and
sales volumes at the Puerto Rico Core facility and higher costs
associated with worldwide growth initiatives. In addition,
margins were lower in the plastic pipe business, polyethylene
volumes decreased, and results from equity companies in the
plastics business line were lower.
Ethylene production was 53 percent higher in the third quarter of
1997, boosted by the completion of the project to restart a
100 percent-owned ethylene unit that had been idle since 1992.
The unit has an annual capacity of 400 million pounds.
Special items in the third quarter and first nine months of 1997
primarily consisted of a gain on the settlement of a
license-related contingency. Special items in the first nine
months of 1996 represented a tax item related to the company's
Puerto Rico Core operations.
25
<PAGE>
Corporate and Other
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996* 1997 1996*
------------------ -----------------
Operating Results
Reported Corporate and
Other $(73) (65) (129) 375
Less special items (15) (6) 53 549
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(58) (59) (182) (174)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(15) (18) (48) (51)
Net interest (29) (37) (87) (109)
Preferred dividend
requirements (18) (13) (53) (31)
Other 4 9 6 17
- -----------------------------------------------------------------
Adjusted Corporate and
Other $(58) (59) (182) (174)
=================================================================
*Restated to reflect that certain costs previously held at
Corporate are now aligned with the operating segments.
Corporate general and administrative expenses decreased 17 and
6 percent in the third quarter and first nine months of 1997,
respectively. This was primarily the result of increased
allocations of corporate costs, particularly information
technology related, to the operating segments.
Net interest represents interest income and expense, net of
capitalized interest. Net interest was lower in both the third
quarter and first nine months of 1997, due to higher capitalized
interest and lower debt levels in 1997.
Preferred dividend requirements includes dividends on the
Phillips Gas Company preferred stock and on the preferred
securities of the Phillips 66 Capital I (Trust I) and Phillips 66
Capital II (Trust II) trusts. The Trust I securities were issued
in May 1996 and the Trust II securities were issued in January
1997, leading to higher preferred dividend requirements in the
third quarter and first nine months of 1997.
Other consists primarily of the company's captive insurance
subsidiary, along with income tax and other items that are not
directly associated with the operating segments on a stand-alone
basis. Other was adversely impacted in both the third quarter
and year-to-date period of 1997 by lower results from the captive
26
<PAGE>
insurance subsidiary, as well as by higher income taxes not
associated with the operating segments.
Special items in the third quarter of 1997 consisted primarily of
after-tax non-cash foreign currency transaction losses of
$13 million, due to the revaluing of an intercompany, sterling-
denominated receivable. In addition, the nine-month period of
1997 included an $83 million favorable resolution of U.S. income
tax issues covering the years 1983 through 1986, related
primarily to income from the company's Kenai liquefied natural
gas facility. In addition, the period included non-cash foreign
currency transaction losses. 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.
27
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
---------------------------------------
At At At
September 30 December 31 September 30
1997 1996 1996
---------------------------------------
Current ratio 1.2 1.1 1.1
Total debt $2,859 3,129 2,885
Preferred stock of
subsidiary $ 345 345 345
Company-obligated
mandatorily redeemable
preferred securities $ 650 300 300
Common stockholders'
equity $4,721 4,251 4,102
Percent of total debt to
capital* 33% 39 38
Percent of floating-rate
debt to total debt 15% 22 16
- -----------------------------------------------------------------
*Capital includes total debt, preferred stock of subsidiary,
company-obligated mandatorily redeemable preferred securities
and common stockholders' equity.
Cash from operations increased $431 million for the nine-month
period ended September 30, 1997, compared with the same period in
1996. Included in cash from operations for the first nine months
of 1997 and 1996 were cash refunds of $107 million and
$209 million, respectively, related to the favorable resolution
of the Kenai LNG tax proceeding. Excluding the cash impact of
these refunds from the IRS, cash from operations increased
$533 million. Contributing to this increase were a $69 million
increase in net operating income, a $161 million settlement
related to J-Block gas production in the U.K. sector of the North
Sea, and a $200 million decrease in the aggregate balance of
accounts receivable sold in 1996. This resulted from payments
made on a receivable monetization program during the first nine
months of 1996, while the program was inactive in the first nine
months of 1997.
During first quarter 1997, Phillips 66 Capital II (Trust II)
completed a $350 million underwritten public offering of
8% Capital Securities. The sole asset of Trust II is
$361 million of the company's 8% Junior Subordinated Deferrable
Interest Debentures due 2037. Phillips owns all of the common
stock of the trust, and fully and unconditionally guarantees the
trust's obligation under the securities.
28
<PAGE>
During the first nine months of 1997, cash increased
$284 million, primarily due to increased cash flow from operating
activities, including the $161 million J-Block settlement and
$107 million tax resolution, and the previously mentioned
$350 million offering of company-obligated mandatorily redeemable
preferred securities. These increases in cash were somewhat
offset by increased capital expenditures and by the repayment of
$270 million of debt.
The increase in cash, combined with decreases in accounts and
notes payable, and long-term debt due within one year, resulted
in an improved current ratio of 1.2 at September 30, 1997,
compared with 1.1 at both year-end 1996 and the end of third
quarter 1996.
On April 14, 1997, Phillips' Board of Directors approved the
company's third dividend rate increase in three years, raising
the quarterly per share dividend to $.34, a 6 percent increase,
effective June 2, 1997. In April, the Board authorized the
expenditure of up to $150 million to repurchase shares of the
company's common stock through December 31, 1999. Periodic
purchases began in late April, and at October 31, 1997,
1,043,600 shares had been repurchased for approximately
$48 million.
During the first nine months of 1997, Phillips increased its
revolving bank credit facility from $1.1 billion to $1.5 billion.
The company's commercial paper program is supported by this
credit facility in an amount equal to 100 percent of the
commercial paper outstanding. The commercial paper program was
raised from $250 million to $1.5 billion this year. At September
30, 1997, no amount was outstanding under either facility. The
company also amended the LTSSP $397 million 25-year term bank
loan to extend the date that any participating bank in the
syndicate of lenders may cease to participate--from November 30,
2001, to December 5, 2004.
Effective September 23, 1997, the company's wholly owned
subsidiary, Phillips Petroleum Company Norway, refinanced its
$300 million revolving credit facility, maturing in 2001, to
secure more favorable interest rates. The committed amount and
term remained unchanged. No amounts were outstanding under this
facility at September 30, 1997.
Phillips' $300 million 9 1/2% Notes due 1997 will mature
November 15, 1997.
29
<PAGE>
In late 1995, Phillips and Shanghai Petrochemical Company Limited
(SPC) formed a joint venture to build and operate a linear
polyethylene plant near Shanghai, China, with an annual capacity
of 220 million pounds. In second quarter 1997, the joint venture
signed loan agreements to partially fund the design and
construction of the plant. Remaining funding was provided by
registered capital previously contributed by Phillips and SPC.
Phillips is guaranteeing the U.S. dollar portion of the loan
agreements, totaling approximately $34 million. SPC is
guaranteeing the foreign currency portion of the loans. Phillips
has a 40-percent interest in the joint venture.
The company now expects to expand its master leasing arrangement,
under which it leases and supervises the construction of retail
outlets, from $50 million to $100 million during fourth quarter
1997. The company has also entered into a master leasing
arrangement for $75 million to upgrade its fleet of four
corporate planes.
On October 30, 1997, the Board of Directors of Phillips'
subsidiary, Phillips Gas Company (PGC), approved the redemption
of its Series A 9.32% Cumulative Preferred Stock, on December 15,
1997. The total issue of 13.8 million shares will be redeemed at
par, or $25 per share, plus accrued dividends of $.2006 per
share. The $348 million required for the stock redemption will
be provided by a loan from a subsidiary of Phillips Petroleum
Company to PGC. The redemption of the preferred stock will
reduce Phillips' fixed charges by approximately $32 million
annually.
30
<PAGE>
Capital Expenditures and Investments
Millions of Dollars
-----------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
Estimated 1997 1997 1996 1997 1996
-------------- ------------------ -----------------
E&P $1,369 345 226 811 702
GPM 135 27 18 86 47
RM&T 245 49 43 149 134
Chemicals 265 67 48 181 136
Corporate
and Other 77 17 18 50 41
- ------------------------------------------------------------------
$2,091 505 353 1,277 1,060
==================================================================
United States $1,062 270 188 736 532
Foreign 1,029 235 165 541 528
- ------------------------------------------------------------------
$2,091 505 353 1,277 1,060
==================================================================
The company's improved operating results, the settlement of the
J-Block gas production dispute, and the Kenai LNG tax settlement
have enhanced Phillips' financial flexibility. As a result, in
October the company increased its 1997 capital budget a second
time, raising it to $2.09 billion from the original 1997 capital
budget of $1.67 billion. The capital budget is at its highest
level since 1982.
The E&P capital spending program received the largest increase--
from its original 1997 capital budget of $905 million to
$1.37 billion. The increase is expected to be used to purchase
the interests of Gulf Canada Resources Limited and Pennzoil
Resources Canada Limited in the Zama/Virgo area, located in
northwest Alberta, Canada; applied to the rights to operate and
explore existing fields in northwest Venezuela; and used for
development projects in Norway, the United Kingdom, and North
America.
Phillips has agreed to pay $269 million for both Gulf Canada's
and Pennzoil's interests in the Zama/Virgo area, and to trade to
Gulf Canada its 100-percent working interest in the Coleville
heavy-oil field in southwest Saskatchewan, Canada, which contains
reserves of approximately 21 million barrels-of-oil equivalent.
The company's working interest in the Zama/Virgo area will be
90 percent for the oil properties and 100 percent for the gas
properties, with combined estimated net reserves of oil and
natural gas of 100 million barrels-of-oil equivalent. Phillips
estimates gross production from Zama/Virgo to be 8,100 barrels of
oil per day in 1998 and 9,150 barrels of oil per day in 1999,
versus 7,500 barrels of oil per day in 1997. Gross gas
31
<PAGE>
production is anticipated to increase to 96 million and
124 million cubic feet in 1998 and 1999, respectively, from
70 million cubic feet in 1997. Both transactions are expected
to close in December 1997.
During second quarter 1997, Phillips and its co-venturers
successfully bid on risk service contracts for three production
fields in Venezuela with gross estimated reserves, after
application of enhanced recovery efforts, of 650 million to
900 million barrels of oil. The Ambrosio field, where Phillips
has a 100-percent interest, currently produces 2,100 barrels of
oil per day. The LL-652 field, where Phillips has a 20-percent
interest, currently produces 11,700 barrels per day. The company
holds a 50-percent interest in La Vela Costa Afuera, with
estimated gross production potential of 20,000 to 30,000 barrels
of oil per day and up to 75 million cubic feet of gas per day.
Production is expected to commence in 2001.
The Venezuelan Congress has approved the proposed terms and
conditions of an extra-heavy oil project proposed by Phillips and
its co-venturers, including Corpoven, S.A., a subsidiary of
Venezuela's state oil company, in the Hamaca region of the
Orinoco Oil Belt in eastern Venezuela. If development occurs,
Corpoven has estimated 2.4 billion barrels of oil could be
recovered, with gross production averaging nearly 200,000 barrels
per day by 2006. Phillips' interest in the joint venture is
20 percent.
In June 1997, Phillips Petroleum Company United Kingdom Limited
and its co-venturers, Agip (U.K.) Limited and BG Exploration and
Production Limited, reached a settlement with Enron Europe Limited
(Enron) concerning J-Block gas production in the U.K. sector of
the North Sea, concluding all J-Block litigation with Enron. As
a result, gas sales commenced in June. The settlement provides
the J-Block owners more flexibility to produce gas and liquids
from fields in the surrounding area, using the J-Block
facilities' capacity to handle up to 100,000 barrels of liquids
and 450 million cubic feet of gas per day. It is anticipated
that for fourth quarter 1997 J-Block gross production will
average approximately 280 million cubic feet of gas per day and
70,000 barrels per day of liquids.
Phillips and Shell U.K. Exploration and Production (Shell)
recently announced two discovery wells: the 22/23b-5 well (Kate),
and the 22/28a-3 (Tornado), both of which straddle the boundary
of blocks 22/23b and 22/28a, east of Aberdeen, Scotland.
Phillips holds a 62.74 percent interest in block 22/28a.
Detailed appraisal programs are planned for each of these wells.
32
<PAGE>
Also in the U.K. North Sea, production began in October at the
Armada field, averaging a net rate of 2,000 barrels of liquids
per day and 30 million cubic feet of natural gas per day. Peak
net production is expected to reach 3,000 barrels of liquids per
day and 52 million cubic feet of natural gas per day in the
fourth quarter 1997. The company has an 11.5 percent interest in
Armada.
The U.K.'s Department of Trade and Industry has approved the
development plan for the Janice field in the U.K. sector of the
North Sea. The field is estimated to contain 70 million barrels
of recoverable oil. First production is scheduled for third
quarter 1998 and peak oil production rates are expected to reach
55,000 gross barrels of oil per day during fourth quarter 1998.
Phillips' interest in the Janice field is 24.4 percent.
In the Norwegian North Sea, construction continues on the new
processing and transportation platform at Ekofisk. This project
(Ekofisk II), which is 86 percent complete, on time and under
budget, replaces the majority of the facilities in the existing
Ekofisk complex. Some of the existing facilities that are to
continue in operation after the start up of Ekofisk II in 1998
will be impacted by the continuing subsidence in the Ekofisk
area, and studies are in progress to determine what future
actions are necessary with regard to these facilities. Future
costs related to subsidence of the existing facilities are not
expected to materially impact the financial results of the
company.
Also in the Norwegian North Sea, a waterflood project for the
Eldfisk field is being planned. The project would involve the
construction of a new unmanned platform, modifications to
existing platforms, laying of new pipelines, and an extensive
drilling program. Phillips' estimated share of the cost of the
project is $255 million. Subject to approval by the Norwegian
authorities, water injection and production could begin in
January 2000.
Oil and gas production from the Mahogany field offshore Louisiana
continues to be less than originally forecasted due to water
production and the limited productivity of the current producing
zones. Gross production averaged 13,000 barrels of oil per day
while gas volumes averaged 21 million cubic feet per day during
the third quarter. A fifth production well is currently being
completed, and recompletions, which are anticipated to improve
production volumes, are planned in other producing zones upon
depletion of lower intervals. Phillips is the field operator
with a 37.5 percent interest.
33
<PAGE>
The company continues to have drilling success in China. During
second quarter 1997, the company and its co-venturers announced
the development of a satellite oil field in Block 15/11 of the
South China Sea. With completion of the well, the Xijiang
24-3-A14, Phillips set a world record for extended-reach drilling
and a record for China's longest measured-depth well. The well
currently is producing 6,800 gross barrels of oil per day and is
expected to flow at more than 10,000 gross barrels per day at full
production. Phillips is the operator of the Xijiang 24-3 field
with a 24.5 percent interest. On November 6, 1997, the company
announced an oil discovery (the Peng Lai 14-3-1 well) in the
Bozhong Block of China's Bohai Bay, approximately 420 miles
southeast of Beijing. Phillips is operator with a 60-percent
interest.
The company has oil mining leases for production of oil and gas
in Nigeria, which interests are operated on behalf of the company
by Nigerian Agip Oil Company. The initial term of the leases was
through June 13, 1997, and, under the lease terms, the company is
entitled to renewal of the lease upon application, assuming it
has performed its obligations under the leases. The company
believes it has performed its obligations and the operator of the
company's interests has made timely application for renewal on
behalf of the company. While renewal of the leases has not yet
been confirmed by Nigerian authorities, the operator has been
advised by the Nigerian authorities that the renewal application
is being processed and that it should continue operations, and
production has continued unabated after June 13, 1997.
Management expects that production will continue and that
renewals will be confirmed in due course. The company's Nigerian
interests represent approximately 7 percent of its currently
reported total worldwide oil and gas reserves, and production and
sale of these reserves contributed approximately $35 million to
the company's after-tax net income in 1996. The company's net
investment in Nigeria at December 31, 1996, was $178 million.
GPM's capital expenditures and investments for the nine months
ended September 30, 1997, increased substantially over the same
period in 1996, primarily due to a purchase of gathering assets
from Amoco Production Company in January 1997. GPM received a
$35 million increase in its 1997 capital budget, primarily for
plant expansions and for projects that will add new raw gas
volumes.
The company continues its planned retail-marketing expansion that
began in 1996. Twenty-one new retail outlets were opened in the
first nine months of 1997. In addition, 10 existing units were
razed and rebuilt. Since the expansion program began, utilizing
both capital funds and a master leasing program, the company has
acquired 24 retail outlets, opened 28 new ones, and razed and
rebuilt 16 others. The new outlets and the existing outlets that
34
<PAGE>
were razed and rebuilt utilize the new Kicks 66 convenience store
design.
The company is going forward with two major pipeline projects--
one to serve markets in the Midwest and the other to carry
petroleum products to markets not previously served by the
company in the Southwest. In February, Phillips and its co-
venturer announced plans to convert a portion of the Seaway
Pipeline system to refined products service. In conjunction with
this conversion, Phillips is constructing a new 150-mile, 18-inch
pipeline to connect the Seaway line to the company's existing
Midwest distribution system to transport gasoline and distillates
from the Gulf Coast to the growing Midwest market. Construction
is scheduled to be completed in the first quarter of 1998.
Construction is expected to begin in the fourth quarter of 1997
on another major pipeline system to transport petroleum products
to markets in El Paso, Texas, and Tucson and Phoenix, Arizona.
This project, scheduled for completion in early 1999, involves
reversing and converting an existing eight-inch natural gas
liquids pipeline that extends from Borger, Texas, to Gaines
County, Texas. In addition, a new 220-mile, 10-inch pipeline
would be constructed from Gaines County to El Paso, and a new
terminal would be built at El Paso.
During first quarter 1997, the company completed a paraxylene
capacity increase at its Puerto Rico Core facility, raising
capacity from 675 million to 880 million pounds per year.
During third quarter 1997, a new 440 million pounds-per-year
high-density polyethylene plant in Singapore was completed and is
in production. This expansion more than doubles the capacity of
an existing plant, bringing total capacity to 870 million pounds
per year. Phillips has a 50-percent interest in the new plant.
To meet its liquidity requirements, including funding its capital
program, the company will look primarily to cash generated from
operations and financing.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income," and
Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Both Statements are effective for
fiscal years beginning after December 15, 1997, and are
disclosure-oriented statements. Therefore, neither Statement
will affect the company's reported consolidated net income or
cash flows. The company has not yet determined whether it will
early adopt either Statement, or the disclosure formats it will
adopt in response to these Statements.
35
<PAGE>
Contingencies
Legal and Tax Matters
The company has a number of issues outstanding with the IRS
related to tax years 1987 through 1992 that are expected to be
resolved in the near term as a result of resolving the Kenai LNG
tax case. Although it is too early to determine the financial
effects, 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.
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 1996, Phillips reported 47 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP). Since then, three sites
were resolved through consent decrees, deposits into trust funds,
or otherwise. Two sites were added during the nine-month period.
Of the 46 sites remaining at September 30, 1997, the company
believes it has a legal defense or its records indicate no
involvement for 16 sites. At seven other sites, present
information indicates that it is probable that the company's
exposure is less than $100,000 per site. At seven sites,
Phillips has had no communication or activity with government
36
<PAGE>
agencies or other PRPs in more than two years. Of the
16 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 September 30, 1997, accruals of $7 million had been made for
the company's unresolved PRP sites. In addition, the company has
accrued $73 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 $5 million for
other environmental contingent liabilities, for total
environmental accruals of $85 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, although claims for
recovery of remediation costs have been filed with certain of the
company's insurers. The ultimate amount, if any, and the timing
of recoveries remains uncertain.
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.
37
<PAGE>
OUTLOOK
Phillips and its co-venturers are studying a plan to develop both
blocks of the Bayu-Undan gas condensate discovery in the Timor
Sea Zone of Cooperation, located between Indonesia and Australia,
as a single field, with BHP Petroleum Pty. Ltd. as unit operator.
The field initially is planned to be developed as a gas-
reinjection project, with liquids production processed on a
floating processing, storage, and offloading facility built from
a modified tanker. The co-venturers plan to start production in
January 2002. A decision is pending on the location and type of
facility to liquefy the natural gas at a later stage in the
project's development.
Phillips global growth strategy in its exploration and drilling
activity continues with opportunities involving foreign joint-
venture partners. In January 1997, the company was awarded a
license for oil and gas exploration and development in deep water
offshore western Greenland. Seismic surveys of the Greenland
acreage indicate the possibility of significant hydrocarbon-
bearing formations, and the company is planning to conduct
drilling activities together with a co-venturer. The first well
is planned for 1998. Phillips has a 38.25 percent interest. In
second quarter 1997, the company and its co-venturers signed an
agreement with the Republic of South Africa and the South Africa
National Oil Co. to explore 14.5 million acres in the Indian
Ocean. Under the initial four-year agreement, Phillips plans to
gather seismic data and drill at least one exploratory well.
Phillips is the operator of the sub-lease with a 40-percent
interest. In third quarter 1997, the company joined a study of
a proposed Alaska North Slope gas project. The study will
examine the viability of producing natural gas from Alaska's
North Slope, transporting it across the state, converting it to
liquid natural gas, and marketing it in the Far East. The study
is expected to be completed by January 1998.
Phillips has drilled the majority of its subsalt portfolio on the
continental shelf in the Gulf of Mexico. Although commercial
success has been limited, the technology has been proven and the
information gained will be extrapolated to the company's next
major exploration program in North America--the drilling of
deep-water blocks in the Gulf of Mexico--and elsewhere. Phillips
has acquired a 33.33 percent interest in 121 offshore deep-water
blocks in the Gulf. Phillips and Mobil Corporation jointly hold
the leases on these tracts, and plan to drill their first joint
deep-water well in 1998. The co-venturers plan to accelerate
deep-water exploration after taking delivery of a contracted
drillship in late 1998.
38
<PAGE>
A delineation well recently drilled on the Tyonek Deep prospect
in Alaska's Cook Inlet did not locate commercial quantities of
hydrocarbons in the target zones. The company is evaluating a
possible second delineation well to be sidetracked from an
existing wellbore in the prospect area before year-end. At
September 30, 1997, total suspended exploratory well costs on the
Tyonek Deep prospect were $64 million.
Over the next three years, Phillips is committed to participating
in 10 wells off the western coast of Australia. The first of
these wells tested the extension of the Perseus field onto
Phillips' acreage. This resulted in the discovery of natural gas
and gas condensate at the Athena 1 well, which flowed 47 million
cubic feet of natural gas and 2,133 barrels of condensate. The
company's interest in the discovery is 50 percent.
Phillips entered into two separate agreements for projects in
Qatar. The company and Qatar General Petroleum Corporation
(QGPC) signed a Heads of Agreement for a new joint-venture
petrochemical complex. The complex would use Phillips'
proprietary polyethylene and hexene-1 manufacturing and catalyst
technology and would feature a 1.1 billion pounds-per-year
ethylene plant. It would also feature manufacturing facilities
capable of producing one billion pounds per year of polyethylene
(high-density and linear low-density), and a hexene-1 plant with
a capacity of 100 million pounds per year. Construction of the
complex is scheduled to begin in 1998, with initial production in
2001. The project is subject to negotiation of definitive
agreements and to the approval of the Boards of Directors of QGPC
and Phillips. Phillips would have a 49-percent interest in this
project. The company also signed a memorandum of understanding
with QGPC and Sasol Limited providing for a feasibility study of
a proposed joint venture for a gas-to-liquids project. A
feasibility study, which is currently being conducted to fully
assess the economics and viability of the new venture, is
scheduled to be completed in first quarter 1998. If a plant is
built, it would produce approximately 20,000 barrels per day of
distillates and naphtha and be scheduled for start-up in 2002.
Phillips would hold a 15-percent interest in this joint venture.
At the company's Houston Chemical Complex in Pasadena, Texas, the
company plans to build a 200 million pounds-per-year hexene-1
plant based on the company's new proprietary selective catalyst
technology. Construction is expected to begin second quarter
1998, with completion in the fourth quarter of 1999.
In October 1997, Phillips signed three letters of intent with
major petrochemical manufacturers in the People's Republic of
China. One project will be a joint feasibility study of an
ethylene complex, which would include a 1.3 billion pounds-per-
year ethylene cracker, polyethylene and polypropylene plants, and
39
<PAGE>
related facilities. Phillips would hold a 50-percent interest in
the complex, subject to approval by Chinese authorities. Another
project will be a joint feasibility study of a 100 million-
pounds-per-year K-Resin styrene-butadiene copolymer plant based
on Phillips' proprietary technology. Finally, Phillips signed a
second letter of intent with Shanghai Petrochemical Company
Limited (SPC) to conduct preliminary studies for the expansion of
a polyethylene plant currently under construction. In 1996,
Phillips and SPC formed a joint venture to build the 220 million
pounds-per-year plant, which is scheduled to come onstream in
1998.
During third quarter 1997, Phillips and Corpoven, an affiliate of
the Venezuelan state oil company, PdVSA, signed a Principles of
Agreement to build a 58,000 barrels-per-day coker and related
facilities at Phillips' Sweeny, Texas, Complex. Under terms of
the agreement, Corpoven would supply up to 165,000 barrels per
day of heavy Venezuelan crude to be processed at the refinery.
Subject to negotiation of definitive documents and to the
approval of the Boards of Directors of Corpoven, PdVSA and
Phillips, construction is now expected to commence in 1998, with
completion in 2000. Phillips would hold a 50-percent interest in
the project.
It is expected that current crude oil prices will be maintained
for the remainder of 1997. The market continues to be supported
by strong global demand growth, contained industry inventory
levels, and the potential for increased turmoil in the Middle
East. To date, natural gas prices in October and November have
been higher than year-ago levels, which could result in fourth
quarter 1997 average prices exceeding both third quarter 1997 and
fourth quarter 1996 levels. However, the longer-term trend in
pricing for much of the winter remains highly dependent on
weather.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Phillips is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 for any forward-looking
statement made by, or on behalf of, the company. The factors
identified in this cautionary statement are important factors
(but not necessarily all important factors) that could cause
actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the company.
40
<PAGE>
Where any such forward-looking statement includes a statement of
the assumptions or bases underlying such forward-looking
statement, the company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good
faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and
actual results can be material, depending on the circumstances.
Where, in any forward-looking statement, the company, or its
Management, expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will
result, or be achieved or accomplished.
Taking into account the foregoing, the following are identified
as important risk factors that could cause actual results to
differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the company:
o Plans to drill wells and develop offshore or onshore
exploration and production properties are subject to the
company's ability to obtain agreements from co-venturers or
partners, and governments; engage drilling, construction and
other contractors; obtain economical and timely financing;
geology, land or sea, or ocean conditions; world prices for
oil, natural gas and natural gas liquids; and foreign and
United States laws, including tax laws.
o Plans for the construction, modernization or debottlenecking
of domestic and foreign refineries and chemical plants, and
the timing of production from such plants are subject to, in
certain instances, approval from the company's and/or
subsidiaries' Boards of Directors; and in general, to the
issuance by foreign, federal, state, and municipal
governments, or agencies thereof, of building,
environmental and other permits; the availability of
specialized contractors and work force; worldwide prices and
demand for the products; availability of raw materials; and
transportation in the form of pipelines, railcars or trucks;
and, in certain instances, loan or project financing.
o The ability to meet liquidity requirements, including the
funding of the company's capital program from operations, is
subject to changes in the commodity prices of the company's
basic products of oil, natural gas and natural gas liquids,
over which Phillips has no control, and to a lesser extent
the commodity prices for its chemical and other products;
its ability to operate its refineries and chemical plants
consistently; and the effect of foreign and domestic
legislation of federal, state and municipal governments that
have jurisdiction in regard to taxes, the environment and
human resources.
41
<PAGE>
o Estimates of proved reserves, raw natural gas supplies,
project cost estimates and planned spending for maintenance
and environmental remediation were developed by company
personnel using the latest available information and data,
and recognized techniques of estimating, including those
prescribed by the Securities and Exchange Commission,
generally accepted accounting principles and other
applicable requirements; however, new or revised information
or changes in scope or economics could cause results to
vary, perhaps materially.
42
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
Reports on Form 8-K
- -------------------
During the three months ended September 30, 1997, the company did
not file any reports on Form 8-K.
43
<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/ Rand C. Berney
-----------------------------
Rand C. Berney
Vice President and Controller
(Chief Accounting and Duly
Authorized Officer)
November 13, 1997
44
<PAGE>
Exhibit 12
PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES
TOTAL ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars
------------------------
Nine Months Ended
September 30
------------------------
1997 1996
------------------------
(Unaudited)
Earnings Available for Fixed Charges
Income before income taxes $1,501 1,759
Distributions in excess of (less
than) equity in earnings of less-
than-fifty-percent-owned companies (16) 19
Fixed charges, excluding capitalized
interest and the portion of the
preferred dividend requirements of a
subsidiary not previously deducted
from income* 265 253
- ---------------------------------------------------------------------------
$1,750 2,031
===========================================================================
Fixed Charges
Interest and expense on indebtedness,
excluding capitalized interest $ 166 186
Capitalized interest 34 25
Preferred dividend requirements of
subsidiary and capital trusts 86 47
One-third of rental expense, net of
subleasing income, for operating leases 27 27
- ---------------------------------------------------------------------------
$ 313 285
===========================================================================
Ratio of Earnings to Fixed Charges 5.6 7.1
- ---------------------------------------------------------------------------
*Includes amortization of capitalized interest totaling approximately
$10 million and $7 million in 1997 and 1996, 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, 1995, and again in 1997. Consolidated interest expense
included a minimal amount of interest related to LTSSP borrowings for the
first nine months of 1997 and 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Phillips Petroleum Company as of
September 30, 1997, and the related consolidated statement of income for
the nine-month period ended September 30, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 899
<SECURITIES> 0
<RECEIVABLES> 1,800
<ALLOWANCES> 20
<INVENTORY> 565
<CURRENT-ASSETS> 3,486
<PP&E> 20,839
<DEPRECIATION> 11,291
<TOTAL-ASSETS> 14,216
<CURRENT-LIABILITIES> 2,823
<BONDS> 2,507
650
0
<COMMON> 689
<OTHER-SE> 4,032
<TOTAL-LIABILITY-AND-EQUITY> 14,216
<SALES> 11,497
<TOTAL-REVENUES> 11,652
<CGS> 9,349<F1>
<TOTAL-COSTS> 9,550<F2>
<OTHER-EXPENSES> 62<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> 1,501
<INCOME-TAX> 751
<INCOME-CONTINUING> 750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 750
<EPS-PRIMARY> 2.85
<EPS-DILUTED> 2.85
<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 trusts.
</FN>
</TABLE>
