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, 2000
-------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-720
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PHILLIPS PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-0400345
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Phillips Building, Bartlesville, Oklahoma 74004
(Address of principal executive offices) (Zip Code)
918-661-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
The registrant had 255,276,894 shares of common stock, $1.25 par
value, outstanding at October 31, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
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Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
---------------------------------
Three Months Nine Months
Ended Ended
September 30 September 30
---------------------------------
2000 1999* 2000 1999*
---------------------------------
Revenues
Sales and other operating revenues $5,109 3,739 15,175 9,332
Equity in earnings of affiliated
companies 78 16 185 64
Other revenues 38 14 67 143
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Total Revenues 5,225 3,769 15,427 9,539
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Costs and Expenses
Purchased crude oil and products 2,931 2,266 9,198 5,504
Production and operating expenses 480 515 1,568 1,513
Exploration expenses 68 52 192 161
Selling, general and
administrative expenses 134 167 497 491
Depreciation, depletion and
amortization 316 229 848 671
Property impairments 97 13 97 64
Taxes other than income taxes 139 53 312 172
Interest expense 99 70 259 210
Foreign currency transaction
losses (gains) 9 (24) 48 16
Preferred dividend requirements
of capital trusts 14 14 40 40
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Total Costs and Expenses 4,287 3,355 13,059 8,842
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Income before income taxes 938 414 2,368 697
Provision for income taxes 512 193 1,250 338
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Net Income $ 426 221 1,118 359
====================================================================
Net Income Per Share of Common
Stock
Basic $ 1.67 .87 4.40 1.42
Diluted 1.66 .87 4.37 1.41
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Dividends Paid $ .34 .34 1.02 1.02
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Average Common Shares Outstanding
(in thousands)
Basic 254,940 253,306 254,217 252,669
Diluted 257,392 255,445 255,769 254,340
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See Notes to Financial Statements.
*Reclassified to conform to current presentation.
1
<PAGE>
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Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-------------------------
September 30 December 31
2000 1999
-------------------------
Assets
Cash and cash equivalents $ 88 138
Accounts and notes receivable (less
allowances: 2000--$18; 1999--$19) 1,567 1,808
Inventories 439 515
Deferred income taxes 195 143
Prepaid expenses and other current assets 165 169
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Total Current Assets 2,454 2,773
Investments and long-term receivables 2,897 1,103
Properties, plants and equipment (net) 15,040 11,086
Deferred income taxes 2 83
Deferred charges 187 156
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Total $20,580 15,201
===================================================================
Liabilities
Accounts payable $ 1,754 1,668
Notes payable and long-term debt due
within one year 410 31
Accrued income and other taxes 892 409
Other accruals 461 412
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Total Current Liabilities 3,517 2,520
Long-term debt 7,509 4,271
Accrued dismantlement, removal and
environmental costs 719 684
Deferred income taxes 1,677 1,480
Employee benefit obligations 494 483
Other liabilities and deferred credits 578 564
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Total Liabilities 14,494 10,002
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Company-Obligated Mandatorily
Redeemable Preferred Securities
of Phillips 66 Capital Trusts I and II 650 650
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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 2,147 2,098
Treasury stock (at cost:
2000--23,193,474 shares;
1999--24,409,545 shares) (1,158) (1,217)
Compensation and Benefits Trust (CBT)
(at cost: 2000--27,880,382 shares;
1999--28,358,258 shares) (944) (961)
Accumulated other comprehensive income
Foreign currency translation adjustments (97) (38)
Unrealized gain on securities 7 7
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (270) (286)
Retained earnings 5,368 4,563
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Total Common Stockholders' Equity 5,436 4,549
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Total $20,580 15,201
===================================================================
See Notes to Financial Statements.
2
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Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Nine Months Ended
September 30
-------------------
2000 1999
-------------------
Cash Flows from Operating Activities
Net income $ 1,118 359
Adjustments to reconcile net income to net
cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 848 671
Property impairments 97 64
Dry hole costs and leasehold
impairment 74 67
Deferred taxes 263 114
Other (127) (137)
Working capital adjustments, net of
acquisition and disposition of
businesses
Increase in aggregate balance of
accounts receivable sold 218 18
Increase in other accounts and
notes receivable (402) (486)
Increase in inventories (87) (41)
Decrease in prepaid expenses and
other current assets 79 132
Increase in accounts payable 147 355
Increase in taxes and other accruals 489 279
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Net Cash Provided by Operating Activities 2,717 1,395
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Cash Flows from Investing Activities
Acquisition of ARCO's Alaskan businesses (6,375) -
Capital expenditures and investments,
including dry hole costs (1,370) (1,351)
Proceeds from contributing assets to joint
ventures 2,055 -
Proceeds from asset dispositions 102 175
Long-term advances to affiliates and
other investments (205) (6)
-----------------------------------------------------------------
Net Cash Used for Investing Activities (5,793) (1,182)
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Cash Flows from Financing Activities
Issuance of debt 3,680 528
Repayment of debt (341) (338)
Purchase of company common stock - (13)
Issuance of company common stock 27 22
Dividends paid on common stock (259) (258)
Other (81) (71)
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Net Cash Provided by (Used for) Financing
Activities 3,026 (130)
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Net Change in Cash and Cash Equivalents (50) 83
Cash and cash equivalents at beginning of
period 138 97
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Cash and Cash Equivalents at End of Period $ 88 180
=================================================================
See Notes to Financial Statements.
3
<PAGE>
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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--Inventories
Inventories consisted of the following:
Millions of Dollars
-------------------------
September 30 December 31
2000 1999
-------------------------
Crude oil and petroleum products $312 145
Chemical products - 285
Materials, supplies and other 127 85
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$439 515
=================================================================
Note 3--Duke Energy Field Services, LLC
On March 31, 2000, Phillips combined its midstream gas gathering,
processing and marketing business with the gas gathering and
processing business of Duke Energy Corporation (Duke Energy)
forming a new company, Duke Energy Field Services, LLC (DEFS).
Duke Energy owns 69.7 percent of the new company, and Phillips
owns 30.3 percent. At the close of business on March 31,
Phillips began accounting for its investment in the new company
on the equity basis. DEFS arranged debt financing and on April 3,
2000, made one-time cash distributions to both Duke Energy and
Phillips. Phillips received $1.22 billion. No gain was
recognized in connection with the transaction because of
Phillips' long-term commitment to purchase natural gas liquids
from DEFS.
Phillips' consolidated results of operations include 100 percent
of the activity of its gas gathering, processing and marketing
business through March 31, 2000, and its 30.3 percent share of
DEFS' earnings since that date. Included in the GPM segment's
before-tax earnings in the third quarter and first nine months of
4
<PAGE>
2000 was $11 million and $26 million, respectively, representing
the amortization of the basis difference between the book value
of Phillips' contribution to DEFS and its 30.3 percent interest
in the equity of DEFS. This difference is being amortized over
15 years, which coincides with the term of the commitment to
purchase natural gas liquids from DEFS.
On August 4, 2000, DEFS, Duke Energy, and Phillips agreed to
modify the Limited Liability Company Agreement governing DEFS to
provide for the admission of a class of preferred members in
DEFS. Subsidiaries of Duke Energy and Phillips purchased new
preferred member interests for $209 million and $91 million,
respectively. The preferred member interests have a 30-year
term, will pay a distribution yielding 9.5 percent annually,
and contain provisions which require their redemption with any
proceeds from an initial public offering (IPO). On May 25, 2000,
DEFS announced that it had postponed its previously proposed IPO
due to market conditions.
Summarized unaudited financial information for DEFS (100 percent)
follows:
Millions of Dollars
--------------------------------------
Three Months April 1, 2000
Ended through
September 30, 2000 September 30, 2000
------------------ ------------------
Revenues $2,552 4,724
Income before income taxes 110 210
Net income 114 207
-----------------------------------------------------------------
The members of DEFS are generally taxable on their respective
shares of income for U.S. and state income tax purposes.
Phillips' share of income taxes incurred directly by DEFS is
reported in equity in earnings, and as such is not included in
income taxes in Phillips' consolidated financial statements.
Note 4--Chevron Phillips Chemical Company LLC
On July 1, 2000, Phillips and Chevron Corporation (Chevron)
combined the companies' worldwide chemicals businesses, excluding
Chevron's Oronite business, into a new company, Chevron Phillips
Chemical Company LLC (CPC). In addition to contributing the
assets and operations included in the company's Chemicals
segment, Phillips also contributed the natural gas liquids
business related to its Sweeny, Texas, Complex. Phillips and
Chevron each own 50 percent of the voting and economic interests
in the new company, and on July 1, 2000, Phillips began
accounting for its investment in CPC using the equity method.
5
<PAGE>
Phillips' consolidated results of operations include 100 percent
of the activity of its chemicals business through June 30, 2000,
and its 50 percent share of CPC's earnings since that date.
In connection with the combination, CPC borrowed $1.67 billion.
The proceeds of the borrowing were used to make cash
distributions of $835 million each to Phillips and Chevron. Also
in connection with the combination, Phillips made a $70 million
cash advance to CPC. This non-interest-bearing advance is
subject to adjustment if the K-Resin styrene-butadiene copolymer
operations fail to meet or if they exceed certain pre-established
production volume thresholds prior to December 2001. Any portion
of the advance not returned to Phillips, or any additional
payments, will be treated as part of Phillips' initial capital
contribution.
Summarized unaudited financial information for CPC (100 percent)
follows:
Millions of Dollars
-------------------
July 1, 2000
through
September 30, 2000
-------------------
Revenues $1,951
Income before income taxes 38
Net income 47
-----------------------------------------------------------------
The members of CPC are generally taxable on their respective
shares of income for U.S. and state income tax purposes.
Phillips' share of income taxes incurred directly by CPC is
reported in equity in earnings, and as such is not included in
income taxes in Phillips' consolidated financial statements.
Note 5--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Millions of Dollars
-------------------------
September 30 December 31
2000 1999
-------------------------
Properties, plants and equipment
(at cost) $24,426 22,728
Less accumulated depreciation,
depletion and amortization 9,386 11,642
-----------------------------------------------------------------
$15,040 11,086
=================================================================
6
<PAGE>
Net properties, plants and equipment increased approximately
$4 billion during the first nine months of 2000, primarily due to
the April 26 and August 1 acquisition of Atlantic Richfield
Company's (ARCO) Alaskan businesses. See Note 6--Alaska
Acquisition. The increase resulting from this acquisition was
partially offset by the company's contribution of its gas
gathering, processing and marketing assets to the DEFS joint
venture on March 31, 2000, and its chemicals business to CPC on
July 1, 2000.
Note 6--Alaska Acquisition
On April 26, 2000, Phillips purchased all of ARCO's Alaskan
businesses, other than three double-hulled tankers under
construction and certain pipeline assets, which were acquired on
August 1, 2000. The acquisition was accounted for using the
purchase method of accounting. Because the purchase was
retroactive to January 1, 2000, the activity from that date until
the dates of closing has been reflected as adjustments to the
purchase price. Results of operations for the acquired
businesses are included in Phillips' income statement effective
from April 26, and August 1, 2000, respectively.
On April 26, at closing, Phillips paid approximately $5.5 billion
in cash. See Note 9--Debt. On August 1, the company paid
approximately $700 million and assumed $265 million of variable-
rate, long-term debt to acquire the double-hulled tankers under
construction and the pipelines.
Under the terms of the purchase agreement, Phillips could pay up
to $500 million as additional purchase price consideration
through December 31, 2004, based on a formula tied to the price
of West Texas Intermediate crude oil and to the volumes of oil
produced from certain of the assets acquired. The company has
made approximately $288 million of such payments for the crude
oil shipments delivered through September 30, 2000. Formula-
based payments for October business are estimated to be
$68 million, leaving an estimated $144 million that may have to
be paid. The final purchase price is also subject to change
based on the results of a post-closing audit.
The allocation of the purchase price to specific assets and
liabilities is preliminary at this time. Based on the
consideration paid to date and a preliminary estimate of the
appraised value of the properties, plants and equipment acquired,
no goodwill has been recorded in the preliminary purchase price
allocation.
7
<PAGE>
The following unaudited pro forma summary presents information as
if the businesses acquired on April 26, and August 1, 2000, had
been acquired at the beginning of each period presented. The pro
forma amounts include certain adjustments, including recognition
of depreciation, depletion and amortization based on the
preliminary allocated purchase price of the assets acquired;
interest on additional debt incurred; capitalization of interest
on major Alaskan projects under development; and adjustments to
conform ARCO Alaska's accounting policies to Phillips'. The pro
forma amounts do not reflect any benefits from economies which
might be achieved from combining the operations. The pro forma
information does not necessarily reflect the actual results that
would have occurred had the businesses been combined during the
periods presented, nor is it necessarily indicative of the future
results of operations of the combined companies:
Millions of Dollars
Except Per Share Amounts
------------------------
Nine Months Ended
September 30
------------------------
2000 1999
------------------------
Revenues $16,544 11,054
Income before income taxes 2,805 886
Net income 1,379 481
Net income per share of common stock
Basic 5.42 1.90
Diluted 5.39 1.89
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Note 7--Comprehensive Income
Phillips' comprehensive income for the three- and nine-month
periods ended September 30, was as follows:
Millions of Dollars
-------------------------------
Three Months Nine Months
Ended Ended
September 30 September 30
-------------- --------------
2000 1999 2000 1999
-------------- --------------
Net income $426 221 1,118 359
After-tax changes in:
Foreign currency translation
adjustments (18) 20 (59) (3)
Net unrealized gain (loss)
on securities - (2) - -
-----------------------------------------------------------------
Comprehensive income $408 239 1,059 356
=================================================================
8
<PAGE>
Note 8--Property Impairments
Property impairment charges totaling $97 million before-tax,
$93 million after-tax, were recorded in the Exploration and
Production (E&P) segment in the third quarter of 2000, primarily
related to the Ambrosio field in Lake Maracaibo, Venezuela.
The Ambrosio exploitation program has not achieved originally
premised results. The company has incorporated drilling results
to date into a full field study, which is now complete. It
appears there is no likely economic scenario that will allow
Phillips to recover its total investment. An impairment charge
of $86.5 million was recorded in the third quarter based on the
difference between the net book value of the investment and the
discounted value of estimated future cash flows.
Note 9--Debt
In late May, Phillips issued $1.15 billion of 8.5% Notes due
2005, and $1.35 billion of 8.75% Notes due 2010, in the public
market. At September 30, 2000, the 8.5% Notes and the 8.75%
Notes had fair market values of $1.21 billion and $1.47 billion,
respectively.
On August 1, 2000, as part of the purchase of ARCO's Alaskan
businesses, Phillips assumed $265 million in variable-rate, long-
term debt. The weighted average interest rate in effect at
September 30, 2000, was 4.7 percent.
Effective April 26, 2000, Phillips entered into a $6.5 billion
364-day revolving credit facility, with terms similar to the
company's existing $1.5 billion revolving credit facility that
expires in May 2002. The company's commercial paper program has
been supported by the two revolving credit facilities in an
amount equal to 100 percent of the commercial paper outstanding.
The commitments under the 364-day facility were automatically
reduced by the amount of the cash distributions received upon
formation of the company's gas gathering, processing and
marketing, and chemicals joint ventures and any long-term debt
issuances. In early April, Phillips received $1.22 billion upon
the formation of DEFS, and in early July received $835 million
upon the formation of CPC. As a result of receiving the proceeds
from the joint ventures and issuing the $2.5 billion of notes,
the commitments under the 364-day revolving credit facility were
reduced to $1.9 billion, leaving total remaining commitments of
$3.4 billion under the two agreements.
9
<PAGE>
At September 30, 2000, Phillips had $1.6 billion of commercial
paper outstanding, of which $1.5 billion was supported by the
$1.5 billion revolving credit facility and $100 million by the
remaining $1.9 billion commitment under the $6.5 billion
revolving credit facility. These amounts approximate fair market
value.
As of September 30, 2000, the company's wholly owned subsidiary,
Phillips Petroleum Company Norway, had reduced debt outstanding
under its two $300 million revolving credit facilities to zero.
These two credit facilities expire in November 2001, and June
2004.
On October 30, 2000, Phillips entered into two new bank credit
facilities: a five-year credit agreement providing for
commitments not to exceed $500 million, and a 364-day credit
agreement for commitments not to exceed $1.0 billion. The new
credit facilities take the place of the 364-day credit agreement
dated as of April 26, 2000, which was terminated October 30,
2000, upon the effectiveness of the new credit facilities, which
are available either as direct bank borrowings or as support for
the issuance of commercial paper. These new credit facilities,
combined with the $1.5 billion revolving credit facility expiring
in May 2002, provide the company with a total of $3.0 billion in
bank credit facilities.
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 or other third-
party recoveries. Based on currently available information, the
company believes that it is remote that future costs related to
known contingent liability exposures will exceed current accruals
by an amount that would have a material adverse impact on the
company's financial statements.
As facts concerning contingencies become known to the company,
the company reassesses its position both with respect to accrued
liabilities and other potential exposures. Estimates that are
particularly sensitive to future change include contingent
liabilities recorded for environmental remediation, tax and legal
matters. Estimated future environmental remediation costs are
subject to change due to such factors as the unknown magnitude of
clean-up 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 that of other responsible
parties. Estimated future costs related to tax and legal matters
10
<PAGE>
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 clean-up under these laws at federal Superfund and comparable
state sites. In the future, the company may be involved in
additional environmental assessments, clean-ups and proceedings.
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, most of which can be
recovered through reductions of future charges for the shipping
or processing of petroleum liquids, natural gas and refined
products.
Note 11--Financial Instruments and Derivative Contracts
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement was scheduled to be
effective for fiscal years beginning after June 15, 1999, but was
postponed for one year by FASB Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133--an amendment of FASB
Statement No. 133." The company is required to adopt Statement
No. 133 on January 1, 2001, and is currently completing the work
necessary for implementation. For additional information, see
"New Accounting Standards" in Management's Discussion and
Analysis, which is incorporated herein by reference.
11
<PAGE>
Note 12--Non-Mineral Operating Leases
Phillips and its co-venturer in the Kenai liquefied natural gas
plant lease two tankers that are used to transport liquefied
natural gas from Kenai, Alaska, to Japan. The previous leases on
these two tankers were due to expire in June and December of
2000. In June 2000, the company and its co-venturer closed on
new five-year leasing arrangements for the two tankers.
Phillips' 70 percent share of future minimum lease payments due
under the new lease terms are:
Millions
of Dollars
----------
2000 $ 12
2001 23
2002 22
2003 22
2004 21
2005 10
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$110
=================================================================
The company's 70 percent share of the guaranteed residual value
of the two tankers is $215 million.
Note 13--Termination Benefits
The following table updates information provided at year-end 1999
on the company's 1998 and 1999 layoff accruals associated with
pre-existing layoff plans. The accrued liability includes
amounts for which Phillips expects to be reimbursed by co-
venturers under applicable agreements.
Millions
of Dollars
----------
Severance liability at December 31, 1999 $73
Additional severance accruals 4
Adjustments to severance accruals (2)
Foreign currency translation adjustments (5)
Benefit payments (33)
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Severance liability at September 30, 2000 $ 37*
=================================================================
*Included $23 million in severance costs under a foreign plan
classified as a long-term liability. These benefits will be
paid out over a 10-year period.
At December 31, 1999, there were 21 remaining staffed positions
that had been identified for termination, but notifications had
not yet been given. By September 30, 2000, all notifications had
been given.
12
<PAGE>
Note 14--Supplemental Cash Flow Information
Non-cash investing and financing activities and cash payments for
the nine-month periods ended September 30 were as follows:
Millions of Dollars
-------------------
2000 1999
-------------------
Non-Cash Investing and Financing Activities
Investment in equity affiliates through
exchange of non-cash assets and
liabilities* $4,023 8
Investment in property, plant and equipment
of ARCO's Alaskan businesses through the
assumption of net non-cash liabilities of
the acquired businesses 460 -
Investment in equity affiliate through
direct guarantee of debt 13 -
Deferred payment obligation to purchase
property, plant and equipment - 26
Company stock issued under compensation
and benefit plans 27 24
Change in fair value of securities 10 5
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Cash payments
Interest
Debt $ 154 212
Taxes and other 22 6
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$ 176 218
=================================================================
Income taxes $ 468 60
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*On March 31, 2000, Phillips combined its gas gathering,
processing and marketing business with the gas processing and
gathering business of Duke Energy Corporation into Duke Energy
Field Services, LLC, and on July 1, 2000, Phillips and Chevron
combined the two companies' worldwide chemicals businesses,
excluding Chevron's Oronite business, into CPC. See Notes 3--
Duke Energy Field Services, LLC and 4--Chevron Phillips Chemical
Company LLC.
Note 15--Income Taxes
The company's effective tax rates for the third quarter and the
first nine months of 2000 were 55 and 53 percent, respectively,
compared with 47 and 48 percent for each of the same periods a
year ago. The effective rates for the third quarter and the
first nine months of 2000 were higher due to increased income in
higher-tax-rate jurisdictions, such as Norway and Nigeria, and
increases in deferred tax assets for which valuation allowances
have been fully provided. This was partially offset by the
relatively lower tax rates on the increased income from the
company's newly acquired Alaska assets.
13
<PAGE>
Note 16--Foreign Currency
The following table summarizes the foreign currency transaction
gains (losses) included in the company's reported net income:
Millions of Dollars
---------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
After-Tax
E&P $ (1) 2 (5) 3
RM&T - 1 (1) -
Chemicals - - (1) (1)
Corporate and Other (9) 16 (29) (6)
-----------------------------------------------------------------
Total $(10) 19 (36) (4)
=================================================================
Before-Tax
E&P $ (1) 7 (17) (8)
RM&T - - (1) -
Chemicals - 1 (1) (1)
Corporate and Other (8) 16 (29) (7)
-----------------------------------------------------------------
Total $ (9) 24 (48) (16)
=================================================================
Note 17--Related Party Transactions
Significant transactions with affiliated parties were:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Operating revenues (a) $414 221 1,154 597
Purchases (b) 304 80 917 204
Operating expenses (c) 4 (1) 5 -
Selling, general and
administrative
expenses (d) 9 28 55 84
Interest income (e) 1 2 6 6
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a) Phillips' E&P segment sells natural gas that it produces in
the Lower 48 region of the United States to DEFS for processing
and marketing. The company sells natural gas liquids, solvents,
and petrochemical feedstocks to CPC and charges CPC for the use
of common facilities, such as steam generators, waste and water
treaters, pumps, and gauges, at its refining operations.
14
<PAGE>
b) Phillips purchases natural gas liquids from DEFS and CPC for
use in its refinery processes.
c) Phillips pays processing fees to various equity companies.
d) Phillips charges both DEFS and CPC for corporate services provided
to the two equity companies under transition service agreements.
Phillips pays fees to its pipeline equity companies for
transporting product.
e) Phillips earned interest on loans to certain Chemicals affiliates,
primarily Sweeny Olefins Limited Partnership.
The amount due from Phillips to its equity companies at
September 30, 2000, and December 31, 1999, was $65 million and
$80 million, respectively. Equity companies owed Phillips
$170 million on September 30, 2000, and $221 million on
December 31, 1999.
Note 18--Segment Disclosures
The company has organized its reporting structure based on the
grouping of similar products and services, resulting in four
operating segments:
(1) Exploration and Production (E&P)--This segment explores for
and produces crude oil, natural gas and natural gas liquids
on a worldwide basis.
(2) Gas Gathering, Processing and Marketing (GPM)--This segment
gathers and processes both natural gas produced by others
and natural gas produced from Phillips' reserves. On
March 31, 2000, Phillips combined its gas gathering,
processing and marketing assets with the gas gathering and
processing business of Duke Energy Corporation into a new
company, Duke Energy Field Services, LLC (DEFS). Effective
at the close of business on March 31, 2000, Phillips' GPM
segment consisted primarily of its equity investment in
DEFS. See Note 3--Duke Energy Field Services, LLC for
additional information on DEFS.
(3) Refining, Marketing and Transportation (RM&T)--This segment
refines, markets and transports crude oil and petroleum
products, primarily in the United States. This segment also
fractionates and markets natural gas liquids.
(4) Chemicals--This segment manufactures and markets
petrochemicals and plastics on a worldwide basis. On
July 1, 2000, Phillips and Chevron Corporation (Chevron)
15
<PAGE>
combined the two companies' worldwide chemicals businesses,
excluding Chevron's Oronite business, into a new company,
Chevron Phillips Chemical Company LLC (CPC). Effective at
the close of business on July 1, 2000, Phillips' Chemicals
segment consisted primarily of its equity investment in CPC.
See Note 4--Chevron Phillips Chemical Company LLC.
Corporate and Other includes general corporate overhead; all
interest revenue and expense, including preferred dividend
requirements of capital trusts; certain eliminations; and various
other corporate activities, such as the company's captive
insurance subsidiary and tax items not directly attributable to
the operating segments.
The company evaluates performance and allocates resources based
on net income, among other items. Intersegment sales are
recorded at prices that approximate market value. There have
been no material changes in the basis of segmentation or in the
basis of measurement of segment net income since the 1999 annual
report.
Analysis of Results by Operating Segment
Millions of Dollars
--------------------------------
Operating Segments
--------------------------------
Three Months Ended E&P GPM RM&T Chemicals
September 30, 2000 --------------------------------
Sales and Other Operating Revenues
External customers $ 2,228 - 2,880 -
Intersegment 139 - 2 -
-------------------------------------------------------------------
Segment sales $ 2,367 - 2,882 -
===================================================================
Net income $ 474 28 45 10
===================================================================
Three Months Ended
September 30, 1999
Sales and Other Operating Revenues
External customers $ 772 254 2,081 632
Intersegment 141 219 145 46
-------------------------------------------------------------------
Segment sales $ 913 473 2,226 678
===================================================================
Net income $ 152 39 47 50
===================================================================
Nine Months Ended
September 30, 2000
Sales and Other Operating Revenues
External customers $ 5,054 255 8,217 1,647
Intersegment 484 287 361 151
-------------------------------------------------------------------
Segment sales $ 5,538 542 8,578 1,798
===================================================================
Net income $ 1,106 108 154 91
===================================================================
Nine Months Ended
September 30, 1999
Sales and Other Operating Revenues
External customers $ 2,011 603 5,004 1,713
Intersegment 333 486 337 107
-------------------------------------------------------------------
Segment sales $ 2,344 1,089 5,341 1,820
===================================================================
Net income $ 318 63 72 120
===================================================================
Total Assets
At September 30, 2000 $13,891 31 3,397 2,297
-------------------------------------------------------------------
At December 31, 1999 $ 6,593 1,197 3,453 2,955
-------------------------------------------------------------------
Analysis of Results by Operating Segment
Millions of Dollars
-----------------------
Corporate
Three Months Ended September 30, 2000 and Other Consolidated
-----------------------
Sales and Other Operating Revenues
External customers $ 1 5,109
Intersegment (eliminations) (141) -
-------------------------------------------------------------------
Segment sales $ (140) 5,109
===================================================================
Net income (loss) $ (131) 426
===================================================================
Three Months Ended September 30, 1999
Sales and Other Operating Revenues
External customers $ - 3,739
Intersegment (eliminations) (551) -
-------------------------------------------------------------------
Segment sales $ (551) 3,739
===================================================================
Net income (loss) $ (67) 221
===================================================================
Nine Months Ended September 30, 2000
Sales and Other Operating Revenues
External customers $ 2 15,175
Intersegment (eliminations) (1,283) -
-------------------------------------------------------------------
Segment sales $(1,281) 15,175
===================================================================
Net income (loss) $ (341) 1,118
===================================================================
Nine Months Ended September 30, 1999
Sales and Other Operating Revenues
External customers $ 1 9,332
Intersegment (eliminations) (1,263) -
-------------------------------------------------------------------
Segment sales $(1,262) 9,332
===================================================================
Net income (loss) $ (214) 359
===================================================================
Total Assets
At September 30, 2000 $ 964 20,580
-------------------------------------------------------------------
At December 31, 1999 $ 1,003 15,201
-------------------------------------------------------------------
16
<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, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The words "intends," "believes," "expects,"
"plans," "scheduled," "anticipates," "estimates," 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 44.
RESULTS OF OPERATIONS
Unless otherwise noted, discussion of results for the three- and
nine-month periods ending September 30, 2000, are based on a
comparison with the corresponding periods in 1999.
Consolidated Results
A summary of the company's net income by business segment
follows:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Exploration and Production
(E&P) $ 474 152 1,106 318
Gas Gathering, Processing
and Marketing (GPM) 28 39 108 63
Refining, Marketing and
Transportation (RM&T) 45 47 154 72
Chemicals 10 50 91 120
Corporate and Other (131) (67) (341) (214)
-----------------------------------------------------------------
Net income $ 426 221 1,118 359
=================================================================
17
<PAGE>
Net income is affected by transactions, defined by Management and
termed "special items," which are not representative of the
company's ongoing operations. These transactions can obscure the
underlying operating results for a period and affect
comparability of operating results between periods. The
following table summarizes the gains/(losses), on an after-tax
basis, from special items included in the company's reported net
income:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Property impairments* $(93) (10) (93) (30)
Work force reduction
charges (5) - (11) (7)
Net gain on asset sales 19 4 21 53
Pending claims and
settlements (2) (2) (26) 26
Other items 2 8 12 (16)
-----------------------------------------------------------------
Total special items $(79) - (97) 26
=================================================================
*See Note 8 to the financial statements for additional
information.
Excluding the special items listed above, the company's net
operating income by business segment was:
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
E&P $ 551 158 1,170 312
GPM 28 39 110 64
RM&T 43 47 156 78
Chemicals 15 42 94 101
Corporate and Other (132) (65) (315) (222)
-----------------------------------------------------------------
Net operating income $ 505 221 1,215 333
=================================================================
Phillips' net income in the third quarter of 2000 was
$426 million, compared with net income of $221 million in the
third quarter of 1999. Special items reduced net income
$79 million in the third quarter of 2000, while special items
netted to zero in the third quarter of 1999. After excluding
special items, net operating income in the third quarter of 2000
was $505 million, compared with $221 million in the third quarter
of 1999.
18
<PAGE>
The 129 percent increase in net operating income in the third
quarter of 2000 was the result of sharply higher earnings in
Phillips' E&P segment. The E&P segment benefited from a
133 percent increase in crude oil production, mainly the result
of the company's acquisition of Atlantic Richfield Company's
Alaskan businesses (ARCO Alaska) in late-April 2000. (See Note
6--Alaska Acquisition in the Notes to Financial Statements for
additional information on the ARCO Alaska acquisition.) The E&P
segment also experienced significantly higher crude oil and
natural gas prices--up 45 and 44 percent, respectively, over the
third quarter of 1999.
Phillips' net income for the first nine months of 2000 was
$1,118 million, a 211 percent increase from the corresponding
period in 1999. Special items reduced nine-month net income by
$97 million in 2000 and benefited net income by $26 million in
1999. After excluding special items, net operating income was
265 percent higher in the 2000 nine-month period. The ARCO
Alaska acquisition; higher crude oil, natural gas and natural gas
liquids prices; and improved refining margins accounted for the
significant improvement in the nine-month 2000 period.
Income Statement Analysis
On March 31, 2000, Phillips and Duke Energy contributed their
midstream gas gathering, processing and marketing businesses to
Duke Energy Field Services, LLC (DEFS). Effective July 1, 2000,
Phillips and Chevron contributed their chemicals businesses,
excluding Chevron's Oronite business, to Chevron Phillips
Chemical Company LLC (CPC). Both of these joint ventures are
being accounted for using the equity method of accounting. Under
the equity method of accounting, Phillips' share of the joint
ventures' net income is recorded in a single line item on the
income statement: "Equity in earnings of affiliated companies."
Correspondingly, the other income statement line items (i.e.,
operating revenues, operating costs, etc.) no longer include
activity related to GPM and Chemicals as of the effective dates
of the joint ventures.
Sales and other operating revenues increased 37 percent in the
third quarter of 2000 and 63 percent in the first nine months.
The increased revenues in both periods reflect higher petroleum
products, crude oil and natural gas prices, as well as the impact
of significantly higher crude oil production and sales volumes
resulting from the ARCO Alaska acquisition. These benefits were
partially offset by the impact of the GPM and Chemicals joint
ventures. Sales and other operating revenues in 1999 included
revenues for GPM and Chemicals. No operating revenues are
included in 2000 for either of these operations after their
contribution to their respective joint ventures.
19
<PAGE>
Equity in earnings of affiliated companies increased 388 percent
in the third quarter of 2000 and 189 percent in the nine-month
period. The increase in both periods was primarily due to the
newly formed DEFS and CPC joint ventures. In addition, the nine-
month period results benefited from higher earnings from Sweeny
Olefins Limited Partnership for the first six months of 2000,
prior to its contribution to CPC.
Other revenues increased 171 percent in the third quarter of
2000, while decreasing 53 percent in the first nine months. Net
gains on asset sales were higher in the third quarter of 2000
than a year ago, but were lower in the nine-month period. In
addition, the nine-month period of 1999 included more favorable
contingency-related activity than did the nine-month period of
2000.
Purchased crude oil and products increased 29 percent in the
third quarter of 2000 and 67 percent in the nine-month period.
The increase in both periods was primarily due to higher
petroleum products and crude oil prices, partially offset by the
effects of the formation of the GPM and Chemicals joint ventures.
Management defines controllable costs as production and operating
expenses; selling, general and administrative expenses; and the
geological, geophysical and lease rentals component of
exploration expenses. Controllable costs, adjusted to exclude
special items and the exploration-expense component, decreased
9 percent in the third quarter of 2000, while increasing
2 percent in the first nine months. In both 2000 periods, costs
were higher as a result of the ARCO Alaska acquisition, partially
offset by the effects of the formation of the GPM and Chemicals
joint ventures.
Exploration expenses increased 31 percent and 19 percent in the
third quarter and first nine months of 2000, respectively. The
increase in the third quarter was primarily due to higher foreign
dry hole costs, compared with a year ago. The increase in
exploration expenses in the nine-month period of 2000 primarily
reflected higher general administrative, geological, geophysical
and lease rental expenses.
Depreciation, depletion and amortization increased 38 percent in
the third quarter of 2000 and 26 percent in the nine-month
period. The increase in both periods was primarily the result of
the larger asset base and higher production rates following the
ARCO Alaska acquisition. Depreciation, depletion and
amortization in 2000 was reduced as a result of the formation of
the GPM and Chemicals joint ventures. In the third quarter of
2000, Phillips recorded property impairments totaling
$97 million, related primarily to the Ambrosio field in Venezuela
20
<PAGE>
(see Note 8--Property Impairments in the Notes to Financial
Statements for additional information).
Taxes other than income taxes were 162 percent higher in the
third quarter of 2000 and 81 percent higher in the nine-month
period. The increase in both periods was attributable to higher
production and property taxes resulting from the ARCO Alaska
acquisition.
Interest expense increased 41 percent in the third quarter of
2000 and 23 percent in the first nine months. The increase in
both periods was primarily due to higher debt balances as a
result of the financing required for the ARCO Alaska acquisition,
partially offset by increased amounts of interest being
capitalized.
Foreign currency transaction losses of $9 million and $48 million
were incurred in the third quarter and first nine months of 2000,
respectively, compared with a gain of $24 million in the third
quarter of 1999 and a loss of $16 million in the nine-month 1999
period. These foreign currency gains and losses were non-cash
and primarily resulted from the revaluation of an intercompany,
sterling-denominated loan. Preferred dividend requirements were
unchanged in both the third quarter and nine-month period of 2000
from the previous year.
21
<PAGE>
Segment Results
E&P
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $ 474 152 1,106 318
Less special items (77) (6) (64) 6
-----------------------------------------------------------------
Net operating income $ 551 158 1,170 312
=================================================================
Dollars Per Unit
--------------------------------------
Average Sales Prices
Crude oil (per barrel)
United States
Alaska $29.08 14.03 28.02 9.97
Lower 48 30.08 19.13 28.23 14.49
Total 29.19 18.42 28.06 13.87
Foreign 29.89 20.80 28.08 15.99
Worldwide 29.44 20.31 28.07 15.50
Natural gas--lease (per
thousand cubic feet)
United States
Alaska 1.39 - 1.41 -
Lower 48 3.83 2.33 3.08 1.95
Total 3.73 2.33 3.04 1.95
Foreign 2.57 2.24 2.45 2.36
Worldwide 3.31 2.30 2.82 2.08
-----------------------------------------------------------------
Millions of Dollars
--------------------------------------
Worldwide Exploration
Expenses
General administrative;
geological and
geophysical; and lease
rentals $40 39 118 94
Leasehold impairment 6 5 16 18
Dry holes 22 8 58 49
-----------------------------------------------------------------
$68 52 192 161
=================================================================
22
<PAGE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Thousands of Barrels Daily
--------------------------------------
Operating Statistics
Crude oil produced
United States
Alaska 294 6 166 7
Lower 48 33 40 35 45
-----------------------------------------------------------------
327 46 201 52
Norway 110 95 112 97
United Kingdom 22 37 26 34
Nigeria 27 19 23 20
China 11 6 12 10
Timor Sea 7 6 7 5
Canada 7 7 7 7
Denmark 4 5 5 3
Venezuela 5 2 4 1
-----------------------------------------------------------------
520 223 397 229
=================================================================
Natural gas liquids produced
United States
Alaska* 24 - 15 -
Lower 48 1 2 1 2
-----------------------------------------------------------------
25 2 16 2
Norway 4 4 5 4
Other areas 6 5 5 5
-----------------------------------------------------------------
35 11 26 11
=================================================================
*Includes for the third quarter and nine months of 2000,
16 thousand and 10 thousand barrels per day, respectively, that
were sold from the Prudhoe Bay lease to the Kuparuk lease for
reinjection to enhance crude oil production.
Millions of Cubic Feet Daily
--------------------------------------
Natural gas produced*
United States
Alaska 171 122 142 122
Lower 48 774 826 769 840
-----------------------------------------------------------------
945 948 911 962
Norway 127 114 135 125
United Kingdom 189 201 215 215
Canada 90 90 85 89
Nigeria 40 9 31 3
-----------------------------------------------------------------
1,391 1,362 1,377 1,394
=================================================================
*Represents quantities available for sale. Excludes gas
equivalent of natural gas liquids shown above.
Liquefied natural gas sales 129 130 121 126
-----------------------------------------------------------------
23
<PAGE>
Net operating income from Phillips' E&P segment increased
249 percent in the third quarter of 2000 and 275 percent in the
nine-month period. The increase in both periods reflects higher
sales prices for crude oil and natural gas, as well as higher
crude oil production and sales levels as a result of the ARCO
Alaska acquisition and higher output from the Norwegian North
Sea.
Phillips' average worldwide crude oil price was $29.44 per barrel
in the third quarter of 2000, compared with $20.31 in the
corresponding period of 1999. Industry crude oil prices were
supported in the third quarter of 2000 by continued demand
growth, limited worldwide supply, concern over heating fuel stock
levels heading into the winter months, and political
uncertainties in the Middle East.
U.S. E&P
--------
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Operating Income
Reported net income $425 94 813 246
Less special items 12 4 14 47
-----------------------------------------------------------------
Net operating income $413 90 799 199
=================================================================
Alaska $270 19 462 40
Lower 48 143 71 337 159
-----------------------------------------------------------------
$413 90 799 199
=================================================================
Net operating income from the company's U.S. E&P operations
increased 359 percent in the third quarter of 2000 and
302 percent in the first nine months. The increase in both
periods is attributable to the ARCO Alaska acquisition, as well
as higher crude oil, natural gas, and liquefied natural gas
prices.
U.S. crude oil production increased substantially in the third
quarter of 2000 due to the ARCO Alaska acquisition. Lower 48
production continued to trend downward in the third quarter,
reflecting property dispositions and field declines. U.S.
natural gas production decreased slightly in the third quarter of
2000, as property dispositions and field declines were mostly
offset by property acquisitions.
Special items in the third quarter of 2000 included a $19 million
net gain on the disposition of an interest in a coal operation,
partially offset by a property impairment. The nine-month period
24
<PAGE>
of 2000 included an additional net gain on asset dispositions.
Special items in the third quarter of 1999 included net gains on
asset sales. The nine-month 1999 period also included additional
gains on asset sales, partially offset by property impairments.
Foreign E&P
-----------
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Operating Income
Reported net income $ 49 58 293 72
Less special items (89) (10) (78) (41)
-----------------------------------------------------------------
Net operating income $138 68 371 113
=================================================================
Net operating income from the company's foreign E&P operations
increased 103 percent in the third quarter of 2000 and
228 percent in the nine-month period. The increase in both
periods was primarily due to higher crude oil prices and, to a
lesser extent, higher natural gas prices. After-tax foreign
currency transaction losses of $1 million and $5 million were
included in foreign E&P's net operating income in the third
quarter and first nine months of 2000, respectively, compared
with foreign currency transaction gains of $2 million and
$3 million in the corresponding periods of 1999.
Foreign crude oil production increased 9 percent in the third
quarter of 2000, as higher production from Norway, Nigeria and
China was partially offset by lower production in the U.K. sector
of the North Sea. Production in Norway benefited from an
improved operating performance, as production in the third
quarter of 1999 was negatively impacted by two maintenance
shutdowns. In the U.K. North Sea, operating interruptions at the
Janice field, as well as lower production at R-Block, contributed
to reduced crude oil production.
Foreign natural gas production increased 8 percent in the third
quarter of 2000, primarily due to increased production in
Nigeria.
Special items in the third quarter included an $86 million
impairment of the Ambrosio field in Venezuela. See Note 8--
Property Impairments in the Notes to Financial Statements for
additional information on the Ambrosio field impairment. The
nine-month period of 2000 also included a deferred tax
adjustment resulting from a tax law change in Australia and a
net gain on property dispositions.
25
<PAGE>
Special items in the third quarter of 1999 consisted primarily of
a property impairment of the Renee field in the U.K. North Sea,
following the drilling of an unsuccessful development well.
Special items in the nine-month period of 1999 also included
charges to increase the decommissioning accruals for certain
North Sea fields, as well as certain deferred tax asset
adjustments.
GPM
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $ 28 39 108 63
Less special items - - (2) (1)
-----------------------------------------------------------------
Net operating income $ 28 39 110 64
=================================================================
Dollars Per Unit
--------------------------------------
Average Sales Prices
U.S. natural gas liquids
(per barrel--
unfractionated)* $22.89 14.95 20.66 11.45
-----------------------------------------------------------------
Thousands of Barrels Daily
--------------------------------------
Operating Statistics**
Raw gas throughput 2,202 1,786 2,058 1,746
-----------------------------------------------------------------
Natural gas liquids
production 126 160 137 153
-----------------------------------------------------------------
*Prices for 1999 represent Phillips' realized prices prior to
the formation of DEFS. The price for the third quarter of 2000
is based on index prices from the Mont Belvieu and Conway
market hubs that are weighted by DEFS' natural gas liquids
component and location mix. The price for the nine-month
period of 2000 is an estimate based on a weighted-average of
Phillips' realized price in the first quarter of 2000 and DEFS'
index prices in the second and third quarters of 2000.
**Production and throughput volumes for 1999 represent Phillips'
production and throughput prior to the formation of DEFS. The
volumes in the third quarter of 2000 represent Phillips'
30.3 percent of DEFS' production and throughput. The volumes
in the nine-month period of 2000 are estimates based on a
weighted-average of Phillips' production and throughput in the
first quarter of 2000 and Phillips' share of DEFS' production
and throughput in the second and third quarters of 2000.
Net operating income from the company's gas gathering, processing
and marketing (GPM) segment decreased 28 percent in the third
quarter of 2000 and increased 72 percent in the nine-month
period. On March 31, 2000, Phillips and Duke Energy contributed
their gas gathering, processing and marketing businesses into
DEFS. Each parent received a one-time cash distribution from
DEFS shortly after the closing of the transaction. Phillips
received $1.22 billion. Phillips is using equity method
accounting for its 30.3 percent interest in DEFS.
26
<PAGE>
As a result of the DEFS transaction, earnings from Phillips' GPM
segment are not directly comparable between the third quarter and
nine-month periods of 2000 and 1999. Some factors affecting the
results of the 2000 and 1999 periods were:
o Net operating income for the first three months of 2000,
compared with the first three months of 1999 (both periods
reflecting results prior to the formation of DEFS), increased
714 percent, due to a 147 percent increase in natural gas
liquids prices.
o Natural gas liquids prices in the third quarter of 2000 were
significantly higher than the third quarter of 1999,
positively impacting this year's third quarter. This benefit
was partially offset by higher natural gas prices.
o DEFS incurred hedging losses during 2000. Phillips' GPM
segment prior to the DEFS transaction did not incur material
hedging gains or losses.
o DEFS' earnings in the second and third quarters of 2000 were
reduced by the interest expense incurred on the approximately
$2.8 billion in financing required to fund the cash
distributions to the joint venturers. Prior to the formation
of DEFS, the GPM segment did not have interest expense. Also,
by receiving equal cash distributions with Duke Energy
Corporation, Phillips monetized approximately 25 percent of
its GPM investment (absent the equal cash distribution to each
joint venturer, Phillips' share in DEFS would have been
approximately 39 percent based on the relative fair values of
the contributed businesses).
Special items in the nine-month period of 2000 primarily
consisted of work force reduction charges, partially offset by
special current and deferred state tax items related to the
closing of the DEFS transaction. Special items in the nine-month
1999 period consisted of work force reduction charges.
27
<PAGE>
RM&T
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $ 45 47 154 72
Less special items 2 - (2) (6)
-----------------------------------------------------------------
Net operating income $ 43 47 156 78
=================================================================
Dollars Per Gallon
--------------------------------------
Average Sales Prices
Automotive gasoline
Wholesale $ .95 .69 .93 .57
Retail 1.10 .82 1.07 .71
Distillates .92 .60 .85 .48
-----------------------------------------------------------------
Thousands of Barrels Daily
--------------------------------------
Operating Statistics
U.S. refinery crude oil
Capacity 360 355 360 355
Crude runs 269 355 320 348
Capacity utilization
(percent) 75% 100 89 98
Natural gas liquids
fractionation
Capacity 137 252 213 252
Processed 103 210 177 214
Capacity utilization
(percent) 75% 83 83 85
Refinery and natural gas
liquids production 423 598 536 594
-----------------------------------------------------------------
Petroleum products outside
sales
United States
Automotive gasoline
Branded 254 245 244 237
Unbranded 38 33 36 39
Spot 26 16 26 18
Aviation fuels 35 42 37 35
Distillates
Wholesale and retail 115 101 113 106
Spot 15 30 22 28
Natural gas liquids
(fractionated) 46 130 97 125
Other products 44 40 38 38
-----------------------------------------------------------------
573 637 613 626
Foreign 43 32 43 36
-----------------------------------------------------------------
616 669 656 662
=================================================================
28
<PAGE>
Net operating income from Phillips' RM&T segment decreased
9 percent in the third quarter of 2000, primarily due to higher
refinery controllable costs and lower refinery gasoline
production volumes, partially offset by higher refinery
distillates margins and improved results from the company's U.K.
petroleum products operations. RM&T's net operating income
increased 100 percent in the nine-month period of 2000,
reflecting higher refinery gasoline and distillates margins,
partly offset by higher refining controllable costs.
Controllable costs were higher in both the third quarter and nine-
month period of 2000, mainly due to increased fuel and utility
costs.
Phillips' refineries ran at 75 percent of capacity in the third
quarter of 2000, compared with 100 percent in the third quarter
of 1999. During this year's quarter, a scheduled shutdown began
July 24 at the Sweeny, Texas, refinery to tie-in a new coker,
vacuum distillation unit, and continuous catalytic reformer. The
refinery resumed operations in late September, and work continues
to integrate the new units into the refinery. The company
expects to achieve operating design levels during the fourth
quarter. Also during the third quarter the Borger, Texas,
refinery underwent a scheduled major maintenance turnaround on
one of its two cat crackers, which was completed and brought back
into full operation by the end of the quarter. These scheduled
plant outages had a significant impact on RM&T's earnings in the
quarter.
The natural gas liquids fractionation and marketing business at
the Sweeny refinery was contributed to CPC on July 1, 2000. This
business was previously included in the RM&T segment. As a
result, RM&T's natural gas liquids fractionation capacity
declined from 252,000 barrels per day to 137,000 barrels per day,
with a corresponding decline in natural gas liquids sales
volumes. The natural gas liquids capacity utilization decreased
in the third quarter of 2000 due to operating interruptions at
the company's 40-percent-owned Conway, Kansas, fractionation
facility.
Special items in the first nine months of 2000 included
contingency related items. Special items in the nine-month
period of 1999 primarily consisted of work force reduction
charges and contingency accruals.
29
<PAGE>
Chemicals
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Millions of Dollars
--------------------------------------
Operating Income
Reported net income $10 50 91 120
Less special items (5) 8 (3) 19
-----------------------------------------------------------------
Net operating income $15 42 94 101
=================================================================
Millions of Pounds
--------------------------------------
Operating Statistics
Production*
Ethylene 931 839 2,699 2,407
Polyethylene 534 632 1,761 1,952
Styrene 204 n/a 204 n/a
Normal alpha olefins 135 n/a 135 n/a
-----------------------------------------------------------------
*Production volumes for periods after July 1, 2000, include
Phillips' 50 percent share of Chevron Phillips Chemical Company
LLP.
Net operating income from the company's Chemicals segment
decreased 64 percent in the third quarter of 2000 and 7 percent
in the nine-month period. On July 1, 2000, Phillips and Chevron
combined the two companies' worldwide chemicals businesses,
excluding Chevron's Oronite business, into a new company, Chevron
Phillips Chemical Company LLC (CPC). Each parent company
received a cash distribution from CPC of $835 million shortly
after the closing of the transaction. Phillips is using the
equity method of accounting for its 50 percent interest in CPC.
As a result of the CPC transaction, earnings from Phillips'
Chemicals segment are not directly comparable between the third
quarter and nine-month periods of 2000 and 1999. Some factors
affecting the results of the 2000 and 1999 periods were:
o Net operating income for the first six months of 2000,
compared with the first six months of 1999 (both periods
reflecting results prior to the formation of CPC), increased
34 percent. The increase was primarily attributable to higher
ethylene, propylene, other chemicals, and plastic pipe margins
and volumes.
o Polyethylene margins weakened in the third quarter of 2000.
In addition, margins for many chemicals and plastics products
turned lower in the month of September, compared with the
earlier months in the quarter.
30
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o CPC's earnings in the third quarter of 2000 were reduced by
the interest expense incurred on the financing required to
fund the cash distributions to the parent companies. Prior to
the formation of CPC, the Chemicals segment did not have
interest expense.
Special items in the third quarter of 2000 included work force
reduction charges--both those incurred by Phillips and Phillips'
50 percent share of those incurred by CPC. Special items in the
third quarter of 1999 represented deferred tax adjustments. In
addition, the nine-month period of 1999 also included favorable
contingency settlements.
Corporate and Other
Millions of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Operating Results
Reported Corporate and
Other $(131) (67) (341) (214)
Less special items 1 (2) (26) 8
-----------------------------------------------------------------
Adjusted Corporate and
Other $(132) (65) (315) (222)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $ (30) (25) (66) (62)
Net interest (79) (49) (192) (144)
Preferred dividend
requirements (9) (10) (30) (31)
Other (14) 19 (27) 15
-----------------------------------------------------------------
Adjusted Corporate and
Other $(132) (65) (315) (222)
=================================================================
Corporate general and administrative expenses increased
20 percent in the third quarter of 2000 and 6 percent in the nine-
month period. The increase in both periods is primarily
attributable to higher benefit-related expenses, partially offset
by lower depreciation expense retained at Corporate.
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Net interest represents interest income and expense, net of
capitalized interest. Net interest costs increased 61 percent in
the third quarter of 2000 and 33 percent in the first nine
months, reflecting higher debt levels in 2000, utilized to help
fund the ARCO Alaska acquisition in April. This was partially
offset by higher capitalized interest.
Preferred dividend requirements represent dividends on the
preferred securities of the Phillips 66 Capital Trusts I and II.
The category "Other" consists primarily of the company's captive
insurance subsidiary, certain foreign currency transaction gains
and losses, and income tax and other items that are not directly
associated with the operating segments on a stand-alone basis.
Results from Other were lower in the third quarter and nine-month
period of 2000, primarily because of foreign currency transaction
losses in the third quarter of 2000, versus gains in the third
quarter of 1999, as well as higher income tax expenses not
associated with the operating segments.
Special items in the first nine months of 2000 primarily included
costs related to the late-March 2000 K-Resin facility incident
that was partially insured by the company's captive insurance
subsidiary. Special items in the third quarter of 1999 consisted
of a contingency item. In addition, the nine-month period
included deferred tax adjustments, insurance claims and a
$24 million favorable resolution of prior years' U.S. income tax
issues.
32
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CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
---------------------------------------
At At At
September 30 December 31 September 30
2000 1999 1999
---------------------------------------
Current ratio .7 1.1 1.1
Total debt $7,919 4,302 4,489
Company-obligated
mandatorily redeemable
preferred securities $ 650 650 650
Common stockholders'
equity $5,436 4,549 4,385
Percent of total debt to
capital* 57% 45 47
Percent of floating-rate
debt to total debt 29% 27 30
-----------------------------------------------------------------
*Capital includes total debt, company-obligated mandatorily
redeemable preferred securities and common stockholders' equity.
Cash from operations in the first nine months of 2000 increased
$1,322 million from the same period in 1999, primarily the result
of a $1,135 million increase in net income and non-working
capital adjustments. Sales of accounts receivable under the
company's receivables monetization program increased cash from
operations by $200 million more than in the same period in 1999.
During the first nine months of 2000, cash and cash equivalents
decreased $50 million. Cash was provided by operating
activities; the $1.22 billion received from DEFS when Phillips'
contributed its gas gathering, processing and marketing assets to
that joint venture; and $835 million received from CPC when
Phillips contributed its chemicals business to that joint
venture. Funds were also provided by debt, including the
issuance of $2.5 billion of notes (discussed below). Funds were
used to acquire ARCO's Alaskan businesses, support the company's
capital expenditures program, and pay dividends.
In April 2000, the company filed a universal shelf registration
statement with the U.S. Securities and Exchange Commission for
$5 billion of various types of debt and equity securities, and
securities convertible into either. The registration statement
became effective April 27, 2000. Securities to be issued under
this universal shelf registration statement can be combined by
prospectus with $1 billion of securities that remained under an
earlier shelf registration statement. As a result, Phillips had
available, to issue and sell, a total of $6 billion of the
33
<PAGE>
various types of securities. In late May, the company issued
$1.15 billion of 8.5% Notes due 2005, and $1.35 billion of 8.75%
Notes due 2010, in the public market, leaving $3.5 billion of
securities available under the shelf registration statement. At
September 30, 2000, the 8.5% Notes and the 8.75% Notes had a fair
market value of $1.21 billion and $1.47 billion, respectively.
Effective April 26, 2000, Phillips entered into a 364-day
$6.5 billion revolving credit facility, with terms similar to the
company's existing $1.5 billion revolving credit facility that
expires in May 2002. The company's commercial paper program has
been supported by the two revolving credit facilities in an
amount equal to 100 percent of the commercial paper outstanding.
The commitments under the 364-day facility were automatically
reduced by the amount of the cash distributions received upon
formation of the company's gas gathering, processing and
marketing, and chemicals joint ventures and any long-term debt
issuances. In early April, Phillips received $1.22 billion upon
the formation of DEFS, and in early July received $835 million
upon the formation of CPC. As a result of receiving the proceeds
from the joint ventures and issuing the $2.5 billion of notes,
the commitments under the 364-day revolving credit facility were
reduced to $1.9 billion, leaving total remaining commitments of
$3.4 billion under the two agreements.
At September 30, 2000, Phillips had $1.6 billion of commercial
paper outstanding, of which $1.5 billion was supported by the
$1.5 billion revolving credit facility and $100 million by the
remaining $1.9 billion commitment under the $6.5 billion
revolving credit facility. These amounts approximate fair market
value.
As of September 30, 2000, the company's wholly owned subsidiary,
Phillips Petroleum Company Norway, had reduced debt outstanding
under its two $300 million revolving credit facilities to zero.
These two credit facilities expire in November 2001, and June
2004.
On October 30, 2000, Phillips entered into two new bank credit
facilities: a five-year credit agreement providing for
commitments not to exceed $500 million, and a 364-day credit
agreement for commitments not to exceed $1.0 billion. The new
credit facilities replace the 364-day credit agreement dated as
of April 26, 2000, which was terminated October 30, 2000, upon
the effectiveness of the new credit facilities, which are
available either as direct bank borrowings or as support for the
issuance of commercial paper.
On August 1, 2000, the company assumed $265 million of variable-
rate, long-term debt when it purchased three tankers under
construction and pipeline assets in Alaska from ARCO.
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<PAGE>
The company has an agreement with a bank-sponsored entity for the
revolving sale of credit card and trade receivables. This
agreement allows for the sale of receivables of up to
$400 million, all of which was outstanding at September 30, 2000.
Phillips also has $200 million available under three master
leasing arrangements, under which it leases and supervises the
construction of retail marketing outlets. At September 30, 2000,
approximately $129 million had been financed under these
arrangements.
On October 12, 2000, Phillips announced that it had sold its coal
interests in three separate transactions for cash proceeds of
$191 million, representing an after-tax gain of $48 million.
These transactions added approximately $19 million in net income
to Phillips' third-quarter earnings, and are expected to add an
estimated $29 million in the fourth quarter. The proceeds from
these transactions were used to reduce debt and fund operations.
Capital Expenditures and Investments
Millions of Dollars
-------------------------------
Nine Months Ended
September 30
Estimated -----------------
2000 2000 1999
--------- -----------------
E&P $1,701 1,109 875
GPM 120 14 90
RM&T 264 167 279
Chemicals 62 63 72
Corporate and Other 158 17 35
-----------------------------------------------------------------
$2,305 1,370 1,351
=================================================================
United States
Alaska $ 509 311 24
Lower 48 855 561 696
Foreign 941 498 631
-----------------------------------------------------------------
$2,305 1,370 1,351
=================================================================
On December 13, 1999, Phillips' Board of Directors (Board)
approved a $1.79 billion capital budget for the year 2000. Since
then, the company's GPM assets and Chemicals assets have been
contributed to joint ventures. The capital programs of these
joint-venture companies are expected to be self-funded, and not
part of Phillips' capital spending program. In March 2000, the
company increased its 2000 capital budget by $515 million to
accommodate the ongoing capital requirements of the Alaskan
businesses acquired from ARCO. The Board also authorized
35
<PAGE>
expenditures of up to $7.04 billion for the ARCO Alaska
acquisition. That acquisition authority included the
$500 million contingent payout that is dependent on the price of
West Texas Intermediate crude oil and the volumes produced from
the acquired assets over the five-year period beginning
January 1, 2000. Phillips has made contingency payments totaling
approximately $288 million for crude oil deliveries through
September 30, 2000. Formula-based payments for October business
are estimated to be $68 million, leaving an estimated
$144 million that may have to be paid.
On August 4, 2000, DEFS, Duke Energy and Phillips agreed to
modify the Limited Liability Company Agreement governing DEFS to
provide for the admission of a class of preferred members in
DEFS. Subsidiaries of Duke Energy and Phillips purchased these
new preferred member interests for $209 million and $91 million,
respectively. The preferred member interests have a 30-year
term, will pay a distribution yielding 9.5 percent annually, and
contain provisions which require their redemption with any
proceeds from an initial public offering (IPO). On May 25, 2000,
DEFS announced that it had postponed its previously proposed IPO
due to market conditions.
On April 26, 2000, Phillips completed the purchase of all of
ARCO's Alaskan businesses, other than three double-hulled tankers
under construction and certain pipeline assets, which were
purchased on August 1, 2000. Phillips paid approximately
$5.5 billion in cash at the closing in April and approximately
$700 million on August 1. The company also assumed $265 million
of variable-rate, long-term debt when it purchased the three
tankers under construction and the pipeline assets.
On April 13, 2000, Phillips, BP Amoco p.l.c. (BP), ARCO, and
Exxon Mobil Corporation (Exxon Mobil) entered into agreements to
align the ownership and operation of the Prudhoe Bay Unit in
Alaska. These agreements became effective on July 1, 2000,
retroactive to January 1, 2000. The agreements altered the
respective equity interests of Exxon Mobil, BP and Phillips in
the Prudhoe Bay Unit, and provided for BP to become the single
operator. After the re-alignment, Phillips has approximately
36 percent ownership in both the oil rim and gas cap portions of
the Prudhoe Bay Unit. Phillips operates the Kuparuk and Alpine
fields--the other major fields on the Alaskan North Slope.
As a result of its Alaskan acquisition, Phillips added reserves
of approximately 2.2 billion barrels of oil equivalent,
effectively doubling the company's reserves, compared with year-
end 1999. Average net production from the acquired assets is
expected to be approximately 325,000 barrels of oil equivalent
per day during the period from April 27, 2000, through
December 31, 2000. Phillips received value for the Alaskan
36
<PAGE>
production from January 1, 2000, to the date of closing,
April 26, 2000, as an adjustment to the purchase price, so the
volumes related to that period will not be reflected in the
company's reported production statistics for 2000.
Development of the Alpine field continues on the North Slope of
Alaska, about thirty miles west of Kuparuk. The Alpine
production facilities are in the final stages of installation
with initial production expected in the fourth quarter of this
year. Net production of approximately 50,000 barrels of oil per
day is expected by the end of the year.
In light of the expected increase in production provided by
Alpine and Phillips' plans to maintain Alaskan production at the
increased level of 375,000 to 400,000 barrels of oil equivalent
per day for the foreseeable future, Phillips announced on
October 13, 2000, that its wholly owned subsidiary, Polar
Tankers, Inc., had contracted to build a fourth double-hulled
Millennium Class tanker for approximately $197 million. Until
the three new double-hulled tankers are placed in service,
Phillips is leasing the tankerage it needs from BP. The leased
tankers will be replaced as the newly constructed tankers are
placed in service. The Polar Endeavor, the first of the
Millennium Class tankers, is scheduled for delivery in early
2001. The fourth tanker is expected in early 2004.
In October of 2000, Phillips agreed to purchase an additional
3.08 percent interest in the Trans Alaska Pipeline System (TAPS)
from BP. Upon regulatory approval, which is expected by the end
of the year, the transaction will be completed, making the
company's new ownership percentage in TAPS approximately
26.8 percent.
In July of 2000, the first phase of a multi-phase development
plan for the company's Peng Lai 19-3 discovery in block 11/05 of
China's Bohai Bay was approved by Phillips. Daily gross
production rates for Phase I are expected to reach 35,000 to
40,000 barrels of oil. First production from Phase I is
scheduled for the first quarter of 2002. In order to fully
integrate the knowledge gained from the reservoir's performance
in Phase I, first production from Phase II is targeted for 2005.
Phillips has a 100 percent interest in the block, but China
National Offshore Oil Corporation has the right to participate in
any development in the block and to acquire a 51 percent
interest.
In July of 2000, the Offshore Kazakhstan International Operating
Company (OKIOC), announced that the Kashagan E-1 well in the
Caspian Sea was a discovery--the first on the Kazakhstan shelf.
37
<PAGE>
The well tested at a rate of up to 3,700 barrels of oil per day
and 7 million cubic feet of gas per day. A second exploration
well began drilling in early October. Phillips has a
7.14 percent interest in OKIOC.
In the Norwegian sector of the North Sea, commissioning of the
gas injection and gas lift systems at the Eldfisk development was
completed and gas injection began in September 2000. The first
incremental production increases attributable to the water
injection portion of this improved oil recovery project at
Eldfisk are expected in the first quarter of 2001.
In Lake Maracaibo, Venezuela, redevelopment drilling efforts on
the Ambrosio field were temporarily suspended and the drilling
rig released while the company evaluated response rates and other
information gathered from the initial redevelopment wells. The
re-evaluation determined that there was no likely economic
scenario that would allow Phillips to recover its total
investment in Ambrosio and an impairment charge was recorded in
the third quarter.
During the third quarter, Phillips purchased the Zama gas
processing plant in northwest Alberta, Canada. The plant, with
minor modifications, should enable the company to bring to market
newly discovered gas by the end of 2000. Phillips is evaluating
its Zama-area interests as part of the company's core business
strategy and may choose to market and sell these interests in late
2000 or early 2001.
On July 24, 2000, selected units of the Sweeny refinery began a
scheduled shutdown for normal maintenance and the tie-in of a
58,000-barrel-per-day coker and a 36,000-barrel-per-day
continuous catalytic reformer. The refinery started up in late
September and work continues to integrate the new units into the
refinery. Operating design levels are expected to be achieved
during the fourth quarter. Phillips and the Venezuelan state oil
company, Petroleos de Venezuela S.A., each hold a 50 percent
interest in Merey Sweeny, L.P., the limited partnership that is
building the coker and related facilities. The continuous
catalytic reformer is a wholly owned project of Phillips.
On September 25, 2000, Phillips announced the acquisition of
River Gas Corporation, a privately held coalbed methane producer
headquartered in Tuscaloosa, Alabama, and the coalbed methane
positions of three other companies in the Powder River Basin of
Wyoming for a total cash expenditure of approximately
$123 million. As a result of these purchases, the company added
an estimated 215 billion cubic feet of net reserves, of which
approximately 100 billion cubic feet were classified as
proved/developed.
38
<PAGE>
Contingencies
Legal and Tax Matters
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 1999, Phillips reported 27 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP). Since then, two sites have
been resolved and three new sites have been added. Of the
28 sites remaining, the company believes it has a legal defense or
its records indicate no involvement for five sites. At four
sites, present information indicates that it is probable that the
company's exposure is less than $100,000 per site. At five sites,
Phillips has had no communication or activity with government
agencies or other PRPs in more than two years. Of the
14 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
39
<PAGE>
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 clean-up 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 clean-up, 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 clean-up costs
generally occur after the parties obtain EPA or equivalent state
agency approval.
At September 30, 2000, $6 million had been accrued for the
company's unresolved PRP sites. In addition, the company has
accrued $106 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 $4 million for
other environmental contingent liabilities, for total
environmental accruals of $116 million.
During the third quarter, the amount accrued for planned
remediation activities increased by approximately $55 million,
primarily driven by an accrual to cover remediation activities
required by the state of Alaska at exploration and production
sites formerly owned by ARCO. Phillips Alaska continues to
evaluate sites where remediation has been required by the state,
and expects to have additional accruals by the end of the year as
remediation activities are defined and fully estimated. Because
this accrual relates to environmental conditions that existed
when Phillips acquired the properties on April 26, 2000, the
charge impacts the allocation of the purchase price of the
acquisition, not the company's net income.
After an assessment of environmental exposures for clean-up 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.
On March 27, 2000, an explosion and fire occurred at Phillips'
K-Resin styrene-butadiene copolymer plant at the Houston Chemical
Complex (HCC). The 370-million-pound-per-year K-Resin facility,
which was contributed to CPC on July 1, 2000, has been idle since
that time. Limited production of K-Resin could resume in the
first quarter of 2001. However, the estimate of the start-up
time frame is preliminary, and the actual start-up date could be
delayed further based on ongoing investigations, operational
reviews, and repair work.
40
<PAGE>
On June 23, 1999, a flash fire occurred in a reactor vessel at
the K-Resin plant. Two individuals employed by a subcontractor,
Zachry Construction Corporation, were killed and other workers
were injured. Eight lawsuits have been filed in connection with
the incident in Texas. The trial of the first of these, a
wrongful death suit, began in October 2000. The other wrongful
death action is set for trial in January 2001. Phillips is the
named defendant in these actions. Under the indemnification
provisions of the subcontracting agreement between Phillips and
Zachry, Phillips has sought indemnification from Zachry with
respect to the claims of the Zachry workers. Phillips has, in
addition, filed an action against various Zachry insurers to
obtain a declaration that coverage is available in regard to the
incident under policies issued by them. If and to the extent
that Phillips ultimately bears any loss in connection with this
incident, CPC, the current owner of the plant, will provide
indemnification to Phillips pursuant to the Contribution
Agreement, under which CPC was formed.
After the incident in March, Phillips notified its K-Resin
customers that it would continue the force majeure declared after
its June 1999 fire and explosion. Allocations to customers
continue to be supplied from CPC's 60-percent-owned Korean joint
venture, K R Copolymer Co., Ltd., which has a capacity of
115 million pounds per year.
On September 21, 2000, the Occupational Safety and Health
Administration (OSHA) issued citations and proposed penalties of
$2.517 million against Phillips for the incident that occurred at
the Houston Chemical Complex on March 27, 2000. Phillips and
CPC, the plant's current owner, disagree with the conclusions
contained in the citations and intend to contest them. On
September 20, 2000, CPC announced a major safety initiative at
the Houston Chemical Complex designed to address issues raised by
the OSHA review and to further enhance safety at the plant.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which was subsequently amended by
Statements No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133--an amendment of FASB Statement No. 133," and
138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an amendment of FASB Statement No. 133" (as
amended, the Statement). Phillips is required to adopt the
Statement January 1, 2001. The Statement will require that all
derivatives be recognized on the balance sheet at fair value.
41
<PAGE>
Derivatives that are not hedges must be adjusted to fair value
through income. If a derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative
will either be recognized in other comprehensive income until the
hedged item is recognized in earnings or offset against the
change in fair value of the hedged asset, liability, or firm
commitment. The ineffective portion of a derivative's change in
fair value will be recognized immediately in earnings.
Having substantially completed an internal assessment of its
operating contracts and current derivative programs, the company
is currently in the process of designating and documenting its
derivative instruments in accordance with the Statement and
expects to be completed with its implementation efforts before
December 31, 2000. Market prices and derivative positions will
change between now and the date of adoption; however, based on
the company's currently active risk management programs and the
derivatives held at September 30, 2000, Management does not
anticipate that adoption of the Statement will have a material
impact on the company's financial statements.
OUTLOOK
Phillips operates in three countries where cutbacks in production
were announced in 1998--Norway, Nigeria and Venezuela. The Norwegian
Ministry of Petroleum and Energy lifted its production curtailment
measures for oil production on the Norwegian continental shelf during
the second quarter of 2000, and curtailments are not expected for the
remainder of the year. The Nigerian government raised its quota,
effective May 1, 2000, reversing all previous quota reductions.
This action affects leases operated on behalf of the company
under the joint operating agreement with Nigerian Agip Oil
Company. In Venezuela, third-bid-round operations have not been
asked to curtail production. Therefore, Phillips does not
expect production curtailments in any of the three countries to have
a material adverse impact on the company's results of operations or
financial position in 2000.
On August 3, 2000, Phillips and Chevron announced a new venture
agreement for exploration and development on Alaska's North Slope
with Alberta Energy Company Ltd. (AEC). The two-part exploration
alliance included nearly 150,000 acres on Alaska's North Slope
and the Beaufort Sea. The companies plan to file permits to
drill the exploration prospect in the first quarter of 2001.
Through a farmout agreement in the initial well, AEC will earn a
33.3 percent interest in seven leases containing approximately
28,000 acres offshore Prudhoe Bay in the proposed McCovey Unit.
42
<PAGE>
Phillips and Chevron will each hold a 33.3 percent interest in
the proposed unit. The second part of the alignment agreement
includes approximately 114,000 acres in the Grizzly Gomo Prospect
area, located south of the Kuparuk oil field. Prospective
exploration drilling in the area is planned for the first quarter
of 2002. Through a farmout agreement, AEC will earn a 20 percent
interest in the area, while Phillips and Chevron each hold a
40 percent interest.
As natural gas prices have firmed, Phillips and its co-venturers
have begun to study various options for commercializing natural
gas reserves on the Alaskan North Slope. While the size of the
natural gas reserves can support more than one project, Phillips
is most interested in developing a pipeline route to the
Lower 48. The company and its co-venturers expect a decision to
be made regarding a pipeline route within the next year, with the
objective of commencing natural gas shipments through the
pipeline by 2007.
Earlier this year, the company announced plans to increase
capacity at it Borger, Texas, refinery through a debottlenecking
project scheduled to begin by the end of 2000. The project is
expected to increase the facility's capacity to process crude oil
by 20,000 barrels per day and move the facility toward production
of lower sulfur products in preparation for meeting new sulfur
regulations. Start-up is expected in 2002. The debottlenecking
project complements the S Zorb sulfur-removal unit which is
currently under construction at the facility and scheduled to
start up in early 2001. Operations at the facility will be largely
unaffected during the debottlenecking project, with most work
occurring during normal scheduled maintenance periods.
Oil prices in the third quarter rose to the highest level since
1990 during the Gulf War. OPEC increased quotas but too late to
allow restocking of inventories. Strong economic growth in both
the United States and Western Europe pushed energy demand high
enough to consume record levels of refinery output, leaving
little heating oil to rebuild inventories before the onset of the
winter heating season. A planned release of crude from the U.S.
Strategic Petroleum Reserve had a brief impact, lowering prices,
but is expected to have little physical impact on product
supplies. High U.S. natural gas consumption also prevented
restocking, and natural gas prices rose to record levels. Price
spikes can be expected during winter cold spells. Renewed
tensions in the Middle East are adding to upward pressures on
prices.
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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. Where
any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement,
the company 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, there can be no
assurance that the statement of expectation or belief will
result, or be achieved or accomplished.
The following are identified as important risk factors, but not
all of the 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 complete the implementation of Management's
announced strategy for its four business segments are
subject to: finding a joint venturer for RM&T; the
negotiation and execution of satisfactory agreements for an
RM&T joint venture; receipt of any approvals that may be
required from state and federal government agencies and
third parties; required disposition of assets, if any, to
meet regulatory requirements; approvals as required by the
Boards of Directors of the entities involved; the successful
development of the company's current projects and the
achievement of production estimates, and cost savings and
synergies that are dependent on the integration of
personnel, business systems and operations; and the
successful operation and financing of its GPM and Chemicals
joint ventures.
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o Plans to drill wells and develop offshore or onshore
exploration and production properties are subject to: the
company's ability to obtain agreements with co-venturers,
partners and governments, including necessary permits; its
ability to engage specialized drilling, construction and
other contractors and equipment; its ability to obtain
economical and timely financing; geological, land, or sea
conditions; world prices for oil, natural gas and natural
gas liquids; adequate and reliable transportation systems,
including the Trans Alaska Pipeline System, the Valdez
Marine Harbor Terminal, and the acquired and to be
constructed crude oil tankers for the hydrocarbons; 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,
including the projects at the Sweeny refinery, and the timing
of production from such plants are subject to: approval from
the company's and/or subsidiaries' Boards of Directors;
obtaining loans and/or project financing; the issuance by
foreign, federal, state, and municipal governments, or
agencies thereof, of building, environmental and other
permits; and the availability of specialized contractors,
work force and equipment. Production and delivery of the
company's products are subject to: worldwide prices and
demand for the products; availability of raw materials; and
the availability of transportation in the form of pipelines,
railcars, trucks or ships.
o The ability to meet liquidity requirements, including the
funding of the company's capital program from borrowings,
asset sales, if any, and operations, is subject to: the
negotiation and execution of various bank, project and public
financings and related financing documents, the market for
any such debt, and interest rates on the debt; the
identification of buyers and the negotiation and execution of
instruments of sale for any assets that may be identified for
sale; changes in the commodity prices of the company's basic
products of oil, natural gas and natural gas liquids, over
which Phillips has little or no control, and to a lesser
extent the commodity prices for chemicals and other products;
its ability to operate its refineries and exploration and
production operations consistently and safely, with no major
disruption in production or transportation of such products;
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.
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o Estimates of proved reserves, 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
U.S. Securities and Exchange Commission, generally accepted
accounting principles and other applicable requirements.
Estimates of cost savings, synergies and the like were
developed by the company from current information. The
estimates for reserves, supplies, costs, maintenance,
remediation, savings and synergies can change positively or
negatively as new information and data becomes available.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following is a description of a legal proceeding involving
governmental authorities under federal, state and local laws
regulating the discharge of materials into the environment.
While it is not possible to predict the outcome of the
proceeding, if it was decided adversely to the company, there
would be no material adverse impact on the company's financial
statements. Nevertheless, such proceedings are reported pursuant
to the U.S. Securities and Exchange Commission's regulations.
On February 11, 2000, the Alaska Department of Environmental
Conservation (ADEC) issued a Notice of Violation to ARCO Alaska
alleging improper testing of its portable oil storage tanks in
the Kuparuk oil field under the state of Alaska oil spill
contingency plan. ARCO Alaska was subsequently acquired by
Phillips. At the end of September 2000, Phillips Alaska signed
an agreement with ADEC whereby Phillips Alaska agreed to pay
$175,190 in settlement of the penalty requested by ADEC. This
amount was based on a calculation of the economic savings that
may have inured to the benefit of Phillips Alaska as a result of
the deferred testing.
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, 2000, the company
filed two reports on Form 8-K.
The first report was filed July 14, 2000, to report in Item 2 the
combination of Phillips' and certain of Chevron's chemicals
businesses to form CPC. The pro forma impact of this transaction
on Phillips' March 31, 2000, balance sheet and income statements
for the year ended December 31, 1999, and three months ended
March 31, 2000, was reported in Item 7.
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The second report was filed August 10, 2000, to report in Item 2
the completion of the purchase of all of ARCO's Alaskan
businesses with the purchase of ARCO's Alaskan pipelines and
three tankers under construction. The pro forma impact of this
transaction on Phillips' 1999 and first quarter 2000 balance
sheets and income statements was reported in Item 7.
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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 10, 2000
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