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 March 31, 2000
----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 1-720
------------------------------------------
PHILLIPS PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-0400345
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Phillips Building, Bartlesville, Oklahoma 74004
(Address of principal executive offices) (Zip Code)
918-661-6600
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
The registrant had 253,855,612 shares of common stock, $1.25 par
value, outstanding at April 30, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Revenues
Sales and other operating revenues $4,735 2,421
Equity in earnings of affiliated companies 21 21
Other revenues 12 97
- -----------------------------------------------------------------
Total Revenues 4,768 2,539
- -----------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 3,083 1,347
Production and operating expenses 519 500
Exploration expenses 51 47
Selling, general and administrative expenses 185 160
Depreciation, depletion and amortization 234 220
Taxes other than income taxes 62 61
Interest expense 61 67
Foreign currency transaction losses 18 25
Preferred dividend requirements of
capital trusts 13 13
- -----------------------------------------------------------------
Total Costs and Expenses 4,226 2,440
- -----------------------------------------------------------------
Income before income taxes 542 99
Provision for income taxes 292 29
- -----------------------------------------------------------------
Net Income $ 250 70
=================================================================
Net Income Per Share of Common Stock
Basic $ .99 .28
Diluted .98 .28
- -----------------------------------------------------------------
Dividends Paid $ .34 .34
- -----------------------------------------------------------------
Average Common Shares Outstanding
(in thousands)
Basic 253,718 252,108
Diluted 254,677 253,427
- -----------------------------------------------------------------
See Notes to Financial Statements.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-----------------------
March 31 December 31
2000 1999
-----------------------
Assets
Cash and cash equivalents $ 131 138
Accounts and notes receivable (less
allowances: 2000--$22; 1999--$19) 1,637 1,808
Inventories 570 515
Deferred income taxes 129 143
Prepaid expenses and other current assets 171 169
- -----------------------------------------------------------------
Total Current Assets 2,638 2,773
Investments and long-term receivables 2,247 1,103
Properties, plants and equipment (net) 9,995 11,086
Deferred income taxes 83 83
Deferred charges 99 156
- -----------------------------------------------------------------
Total $15,062 15,201
=================================================================
Liabilities
Accounts payable $ 1,681 1,668
Notes payable and long-term debt due
within one year 80 31
Accrued income and other taxes 567 409
Other accruals 273 412
- -----------------------------------------------------------------
Total Current Liabilities 2,601 2,520
Long-term debt 3,889 4,271
Accrued dismantlement, removal and
environmental costs 661 684
Deferred income taxes 1,474 1,480
Employee benefit obligations 491 483
Other liabilities and deferred credits 591 564
- -----------------------------------------------------------------
Total Liabilities 9,707 10,002
- -----------------------------------------------------------------
Company-Obligated Mandatorily Redeemable
Preferred Securities of Phillips
Capital Trusts I and II 650 650
- -----------------------------------------------------------------
Common Stockholders' Equity
Common stock--500,000,000 shares
authorized at $1.25 par value
Issued (306,380,511 shares)
Par value 384 383
Capital in excess of par 2,104 2,098
Treasury stock (at cost:
2000--24,203,708 shares;
1999--24,409,545 shares) (1,207) (1,217)
Compensation and Benefits Trust (CBT)
(at cost: 2000--28,358,258 shares;
1999--28,358,258 shares) (961) (961)
Accumulated other comprehensive income
Foreign currency translation adjustments (58) (38)
Unrealized gains on securities 8 7
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (282) (286)
Retained earnings 4,717 4,563
- -----------------------------------------------------------------
Total Common Stockholders' Equity 4,705 4,549
- -----------------------------------------------------------------
Total $15,062 15,201
=================================================================
See Notes to Financial Statements.
2
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Cash Flows from Operating Activities
Net income $ 250 70
Adjustments to reconcile net income to net
cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 234 220
Dry hole costs and leasehold impairment 13 21
Deferred taxes 24 4
Other 71 (22)
Working capital adjustments
Increase in aggregate balance of
accounts receivable sold 118 9
Increase in other accounts and notes
receivable (35) (90)
Increase in inventories (58) (4)
Increase in prepaid expenses and other
current assets (5) (24)
Increase (decrease) in accounts payable 85 (9)
Increase (decrease) in taxes and other
accruals 73 (6)
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 770 169
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments,
including dry hole costs (299) (368)
Proceeds from asset dispositions 7 104
Long-term advances to affiliates and
other investments (42) (2)
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (334) (266)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 57 499
Repayment of debt (391) (164)
Purchase of company common stock - (12)
Issuance of company common stock 2 3
Dividends paid on common stock (86) (86)
Other (25) (31)
- -----------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities (443) 209
- -----------------------------------------------------------------
Net Change in Cash and Cash Equivalents (7) 112
Cash and cash equivalents at beginning
of period 138 97
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 131 209
=================================================================
See Notes to Financial Statements.
3
<PAGE>
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Petroleum Company
Note 1--Interim Financial Information
The financial information for the interim periods presented in
the financial statements included in this report is unaudited and
includes all known accruals and adjustments which Phillips
Petroleum Company (hereinafter referred to as "Phillips" or "the
company") considers necessary for a fair presentation of the
consolidated financial position of the company and its results of
operations and cash flows for such periods. All such adjustments
are of a normal and recurring nature.
On March 31, 2000, the company combined its gas gathering,
processing and marketing business with the gas gathering and
processing business of Duke Energy Corporation (Duke Energy) in a
new company, Duke Energy Field Services. Phillips' consolidated
results of operations for the three months ended March 31, 2000,
include the activity of its gas gathering, processing and
marketing business. At the close of business March 31, 2000,
Phillips began accounting for its investment in the new company
on an equity basis.
Note 2--Inventories
Inventories consisted of the following:
Millions of Dollars
-----------------------
March 31 December 31
2000 1999
-----------------------
Crude oil and petroleum products $194 145
Chemical products 290 285
Materials, supplies and other 86 85
- -----------------------------------------------------------------
$570 515
=================================================================
4
<PAGE>
Note 3--Properties, Plants and Equipment
Properties, plants and equipment included the following:
Millions of Dollars
-----------------------
March 31 December 31
2000 1999
-----------------------
Properties, plants and equipment
(at cost) $20,413 22,728
Less accumulated depreciation,
depletion and amortization 10,418 11,642
- -----------------------------------------------------------------
$ 9,995 11,086
=================================================================
Net property, plant and equipment decreased approximately
$1.1 billion, primarily due to the combination of the company's
gas gathering, processing and marketing assets with the gas
gathering and processing business of Duke Energy Corporation.
See Note 11--Segment Disclosures.
Note 4--Debt
At March 31, 2000, there was no revolving debt outstanding under
the company's $1.5 billion revolving credit facility, but
$242 million of commercial paper was outstanding, which is
supported 100 percent by the credit facility. Also, the
company's wholly owned subsidiary, Phillips Petroleum Company
Norway, has $600 million available under two revolving credit
facilities. At March 31, 2000, $130 million was outstanding
under the facilities. In April, Phillips issued additional
commercial paper to fund the acquisition of Atlantic Richfield
Company's Alaskan oil and gas properties and related marine
assets that are currently operating. See Note 12--Subsequent
Events and Significant Transactions.
Note 5--Income Taxes
The company's effective tax rates for the three-month periods
ended March 31, 2000 and 1999, were 54 percent and 29 percent,
respectively. The 1999 effective rate was impacted by favorable
resolution of certain outstanding issues with the Internal
Revenue Service (IRS). The effective rate for the three-month
period ended March 31, 1999, excluding benefit of the IRS
settlement, was 50 percent. The first-quarter rate for 2000
reflects a higher proportion of income in higher-tax-rate
jurisdictions.
5
<PAGE>
Note 6--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 other responsible parties.
Estimated future costs related to tax and legal matters are
subject to change as events evolve and as additional information
becomes available during the administrative and litigation
process.
Environmental--The company is subject to federal, state and local
environmental laws and regulations. These may result in
obligations to remove or mitigate the effects on the environment
of the placement, storage, disposal or release of certain
chemical, mineral and petroleum substances at various sites. The
company is currently participating in environmental assessments
and 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.
6
<PAGE>
Note 7--Supplemental Cash Flow Information
Non-cash investing and financing activities and cash payments for
interest and income taxes for the three-month periods ended
March 31 were as follows:
Millions of Dollars
-------------------
2000 1999
-------------------
Non-Cash Investing and Financing Activities
Investment in equity affiliate through
exchange of non-cash assets and
liabilities* $1,068 -
Change in fair value of securities 9 -
Company stock issued under
compensation and benefit plans 5 4
- -----------------------------------------------------------------
Cash Payments
Interest
Debt $ 80 79
Taxes and other 4 1
- -----------------------------------------------------------------
$ 84 80
=================================================================
Income taxes $ 70 9
- -----------------------------------------------------------------
*On March 31, 2000, Phillips combined its gas gathering,
processing and marketing assets with the gas processing and
gathering business of Duke Energy Corporation into Duke Energy
Field Services. See Note 11--Segment Disclosures.
The working capital and non-working capital adjustments for the
three months ended March 31, 2000, are net of the effect of
assets and liabilities transferred to Duke Energy Field Services.
Note 8--Foreign Currency
The following table summarizes the foreign currency transaction
gains (losses) included in the company's reported net income for
the three-month periods ended March 31:
Millions of Dollars
-------------------
2000 1999
-------------------
After-Tax
E&P $ (3) 1
RM&T - -
Chemicals (1) (1)
Corporate and Other (4) (14)
- -----------------------------------------------------------------
Total $ (8) (14)
=================================================================
Before-Tax
E&P $(12) (9)
RM&T - -
Chemicals (1) (2)
Corporate and Other (5) (14)
- -----------------------------------------------------------------
Total $(18) (25)
=================================================================
7
<PAGE>
Note 9--Comprehensive Income
Phillips' comprehensive income for the three-month periods ended
March 31 was as follows:
Millions of Dollars
-------------------
2000 1999
-------------------
Net income $250 70
After-tax changes in:
Foreign currency translation adjustments (20) (12)
Net unrealized gain on available-for-sale
securities 1 -
- -----------------------------------------------------------------
Comprehensive income $231 58
=================================================================
Note 10--Termination Benefits
The following tables update information provided at year-end 1999
on the company's 1998 and 1999 layoff accruals associated with
pre-existing layoff plans, as well as the number of employees
impacted. 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 1
Adjustments to severance accruals (2)
Foreign currency translation adjustments (3)
Benefit payments (25)
- -----------------------------------------------------------------
Severance liability at March 31, 2000 $ 44*
=================================================================
*Included $38 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.
Number
of Employees
------------
Staffed positions identified for termination at
December 31, 1999 21
Positions terminated in first quarter 2000
(notifications given) (21)
- -----------------------------------------------------------------
Staffed positions remaining to be terminated at
March 31, 2000 -
=================================================================
8
<PAGE>
Note 11--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 the company's own 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. Effective at close of
business March 31, 2000, Phillips' GPM segment consisted
primarily of its equity investment in Duke Energy Field
Services. In connection with the closing, Phillips received
$1.22 billion in cash on April 3, 2000. Since this cash
receipt exceeded the book value of the net assets
contributed, Phillips' net investment in Duke Energy Field
Services will have a credit balance and be shown in Other
liabilities and deferred credits on the balance sheet. This
will result in the GPM segment's total assets declining
substantially in the second quarter of 2000.
(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.
Corporate and All 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, among other items, net income. Intersegment sales are
recorded at 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.
9
<PAGE>
Analysis of Results by Operating Segment
Millions of Dollars
---------------------------------
Operating Segments
---------------------------------
E&P GPM RM&T Chemicals
Three Months Ended March 31, 2000 ---------------------------------
Sales and Other Operating Revenues
External customers $1,064 255 2,616 799
Intersegment 190 287 182 71
- --------------------------------------------------------------------
Segment sales $1,254 542 2,798 870
====================================================================
Net income $ 241 51 23 26
====================================================================
Three Months Ended March 31, 1999
Sales and Other Operating Revenues
External customers $ 556 154 1,217 494
Intersegment 83 111 94 26
- --------------------------------------------------------------------
Segment sales $ 639 265 1,311 520
====================================================================
Net income (loss) $ 90 6 (8) 29
====================================================================
Total Assets
At March 31, 2000 $6,493 1,087 3,465 3,100
- --------------------------------------------------------------------
At December 31, 1999 $6,593 1,197 3,453 2,955
- --------------------------------------------------------------------
Millions of Dollars
---------------------------
Corporate
and All Other Consolidated
Three Months Ended March 31, 2000 ---------------------------
Sales and Other Operating Revenues
External customers $ 1 4,735
Intersegment (eliminations) (730) -
- --------------------------------------------------------------------
Segment sales $ (729) 4,735
====================================================================
Net income (loss) $ (91) 250
====================================================================
Three Months Ended March 31, 1999
Sales and Other Operating Revenues
External customers $ - 2,421
Intersegment (eliminations) (314) -
- --------------------------------------------------------------------
Segment sales $ (314) 2,421
====================================================================
Net income (loss) $ (47) 70
====================================================================
Total Assets
At March 31, 2000 $ 917 15,062
- --------------------------------------------------------------------
At December 31, 1999 $1,003 15,201
- --------------------------------------------------------------------
Note 12--Subsequent Events and Significant Transactions
E&P Acquisition
On April 26, 2000, the company completed the purchase of all of
Atlantic Richfield Company's Alaskan businesses, other than three
double-hulled tankers currently under construction and certain
pipeline assets. The pipeline assets are subject to other
owners' preferential rights and the approval of the Regulatory
Commission of Alaska. The preferential rights on the pipeline
assets were not exercised, so Phillips plans to file its request
for permission to transfer ownership of the pipelines in the near
future. The three tankers under construction are subject to the
grant of consents to certain construction contract assignments.
The company expects to complete the acquisition of the tankers
and pipeline assets late in the second quarter or early in the
third quarter of 2000. The acquisition will be accounted for
using the purchase method. The purchase was retroactive to
January 1, 2000, and the activity from that date until April 26,
2000, was reflected as an adjustment to the purchase price.
Using the proceeds generated from the GPM joint venture and new
debt financing ($4.5 billion of commercial paper bearing an
average interest rate of 6.31 percent), Phillips paid
approximately $5.5 billion in cash at closing on April 26. The
company expects to pay approximately $700 million and assume
approximately $300 million of ARCO long-term debt when it
purchases the three tankers under construction and the pipeline
assets. In addition, under the terms of the purchase agreement,
Phillips could pay up to $500 million more over the next five
years, 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 payment made on April 26,
10
<PAGE>
2000, included $73 million for these formula-based payments for
the three-month period ending March 31, 2000, leaving
$427 million that may have to be paid. There may be purchase
price adjustments later in 2000 after an audit of the preliminary
estimates of the cash flows generated by the purchased Alaskan
businesses prior to closing, and after the calculation of the
fair value of the crude oil inventory on hand at April 26 is
finalized.
Chemicals Joint Venture
On February 7, 2000, Phillips announced that it had signed a
letter of intent to form a 50/50 joint venture with Chevron
Corporation combining the two companies' worldwide chemicals
businesses, other than the Oronite additives business being
retained by Chevron. The transaction has been approved by the
companies' Boards of Directors and the U.S. Federal Trade
Commission and is expected to close in mid-2000, subject to the
signing of definitive agreements, and other regulatory review and
approval. In addition to all the assets and operations included
in Phillips' Chemicals segment, the natural gas liquids
fractionation assets located at the Sweeny Complex and associated
pipelines will also become part of the joint venture.
11
<PAGE>
- -----------------------------------------------------------------
Management's Discussion and Phillips Petroleum Company
Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis contains forward-looking
statements including, without limitation, statements relating to
the company's plans, strategies, objectives, expectations,
intentions, and 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 33.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three-
month period ending March 31, 2000, is based on a comparison with
the corresponding period in 1999.
Consolidated Results
A summary of the company's net income by business segment
follows:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Exploration and Production (E&P) $241 90
Gas Gathering, Processing and Marketing (GPM) 51 6
Refining, Marketing and Transportation (RM&T) 23 (8)
Chemicals 26 29
Corporate and Other (91) (47)
- -----------------------------------------------------------------
Net Income $250 70
=================================================================
12
<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
March 31
-------------------
2000 1999
-------------------
Pending claims and settlements $(30) 38
Net gains on asset sales 7 33
Work force reduction charges (6) (5)
Other 8 -
- -----------------------------------------------------------------
Total special items $(21) 66
=================================================================
Excluding the special items listed above, the company's net
operating income by business segment was:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2000 1999
-------------------
E&P $223 55
GPM 57 7
RM&T 27 (6)
Chemicals 28 22
Corporate and Other (64) (74)
- -----------------------------------------------------------------
Net operating income $271 4
=================================================================
Phillips' net income in the first quarter of 2000 was
$250 million, a 257 percent increase from net income of
$70 million in the first quarter of 1999. Net income was reduced
$21 million by special items in the first quarter of 2000 and
benefited $66 million from special items in the first quarter of
1999. After excluding these special items, net operating income
for the first quarter of 2000 was $271 million, a significant
improvement from $4 million in the first quarter of 1999.
Net operating income was higher in all operating segments, with
substantial increases posted by E&P and GPM. The upstream
segments benefited from sharply higher crude oil and natural gas
liquids prices, as well as higher natural gas prices.
13
<PAGE>
Downstream, RM&T benefited from higher refinery and wholesale
product margins, while Chemicals earnings improved on increased
sales volumes of certain key chemicals and plastics products.
Corporate and Other incurred lower expenses in the first quarter
of 2000, primarily because of lower foreign currency losses.
Income Statement Analysis
Sales and other operating revenues increased 96 percent in the
first quarter of 2000, while purchase costs increased
129 percent. Both increases reflect higher sales and purchase
prices across all of the company's major product lines. Of
particular significance were sharply higher petroleum products
and crude oil prices.
Equity in earnings of affiliated companies was unchanged in the
first quarter of 2000, while other revenues decreased 88 percent.
Other revenues in the first quarter of 1999 included higher net
gains on asset sales than the first quarter of 2000. The first
quarter of 1999 also included a favorable contingency settlement,
while the first quarter of 2000 included costs associated with
the K-Resin styrene-butadiene copolymer plant explosion and fire.
Controllable costs are primarily production and operating
expenses; and selling, general and administrative expenses.
Controllable costs, adjusted to exclude special items, increased
4 percent in the first quarter of 2000, reflecting higher fuel
and utility expenses at the company's downstream manufacturing
facilities and increased costs to support higher production
levels. These increases were partially offset by lower
controllable costs in E&P, mainly from U.S., Norwegian and
Venezuelan operations. Special items excluded from controllable
costs totaled $35 million in the first quarter of 2000, and
primarily related to the K-Resin styrene-butadiene copolymer
plant explosion and fire, and work force reduction charges. In
the first quarter of 1999, special items excluded from
controllable costs totaled $6 million, and consisted primarily of
work force reduction expenses.
Exploration expenses increased 9 percent in the first quarter of
2000, as lower dry hole charges were more than offset by higher
geological, geophysical and lease rental expenses.
Depreciation, depletion and amortization (DD&A) increased
6 percent in the first quarter of 2000. Contributing to the
increase was higher DD&A expense from the company's U.K. E&P
operations, where several new fields came online during or after
the first quarter of 1999, as well as DD&A expense from new
producing fields in the Timor Sea. Taxes other than income taxes
were slightly higher in the first quarter of 2000, while
14
<PAGE>
interest expense decreased 9 percent. The lower interest expense
was attributable to higher capitalized interest associated with
E&P projects in the Timor Sea and Venezuela, and the RM&T coker
project at the Sweeny refinery.
Foreign currency transaction losses of $18 million were recorded
in the first quarter of 2000, compared with losses of $25 million
in the first quarter of 1999. Preferred dividend requirements
were unchanged in the first quarter of 2000 from the prior year.
Segment Results
E&P
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $ 241 90
Less special items 18 35
- -----------------------------------------------------------------
Net operating income $ 223 55
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices
Crude oil (per barrel)
United States $26.79 9.93
Foreign 27.16 11.22
Worldwide 27.09 10.88
Natural gas--lease (per thousand cubic feet)
United States 2.40 1.60
Foreign 2.38 2.44
Worldwide 2.39 1.95
- -----------------------------------------------------------------
Millions of Dollars
-------------------
Worldwide Exploration Expenses
Geological, geophysical and lease rentals $ 38 26
Leasehold impairment 5 6
Dry holes 8 15
- -----------------------------------------------------------------
$ 51 47
=================================================================
15
<PAGE>
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Thousands of
Barrels Daily
-------------------
Operating Statistics
Crude oil produced
United States 44 57
Norway 112 103
United Kingdom 31 29
Nigeria 24 22
China 14 14
Canada 6 7
Timor Sea 6 -
Denmark 4 -
Venezuela 3 1
- -----------------------------------------------------------------
244 233
=================================================================
Natural gas liquids produced
United States 1 2
Norway 5 3
Other areas 5 5
- -----------------------------------------------------------------
11 10
=================================================================
Millions of
Cubic Feet Daily
-------------------
Natural gas produced*
United States 889 982
Norway 141 148
United Kingdom 257 256
Canada 87 92
Nigeria 27 -
- -----------------------------------------------------------------
1,401 1,478
=================================================================
*Represents quantities available for sale. Excludes gas
equivalent of natural gas liquids shown above.
Liquefied natural gas sales 116 130
- -----------------------------------------------------------------
E&P's net operating income increased 305 percent in the first
quarter of 2000, primarily due to a significant increase in crude
oil prices, as well as higher natural gas prices. Also
contributing to the improved performance were higher crude oil
production volumes.
Phillips' average worldwide crude oil price was $27.09 per barrel
in the first quarter of 2000, $16.21 per barrel--149 percent--
higher than the first quarter of 1999. Industry crude oil prices
continued their strong upward trend in the first two months of
2000, as reduced global supply and increased global demand kept
16
<PAGE>
worldwide crude oil inventory levels low. Crude oil prices eased
somewhat in March, as key exporting countries agreed to
moderately increase output.
U.S. E&P
- --------
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Operating Income
Reported net income $121 73
Less special items 7 35
- -----------------------------------------------------------------
Net operating income $114 38
=================================================================
Net operating income increased 200 percent in the company's U.S.
E&P operations, primarily the result of a 170 percent increase in
crude oil prices and a 50 percent increase in natural gas prices.
Liquefied natural gas prices were higher as well, and U.S. E&P
lowered their production and operating expenses. Partially
offsetting these items were decreased crude oil and natural gas
production volumes.
U.S. crude oil production declined 23 percent in the first
quarter of 2000, while natural gas production decreased
9 percent. Both decreases reflect the impact of property
dispositions and normal field declines. The decrease in natural
gas production was mitigated by an acquisition of producing gas
properties in north Louisiana in the second quarter of 1999.
Special items in the first quarter of 2000 primarily included a
net gain on asset sales. Special items in the first quarter of
1999 included a net gain on asset sales of $32 million, as well
as favorable contingency settlements.
17
<PAGE>
Foreign E&P
- -----------
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Operating Income
Reported net income $120 17
Less special items 11 -
- -----------------------------------------------------------------
Net operating income $109 17
=================================================================
Net operating income from the company's foreign E&P operations
increased 541 percent in the first quarter of 2000. The increase
was primarily due to higher crude oil prices and production
volumes, partially offset by higher depreciation, depletion and
amortization charges and higher exploration expenses. After-tax
foreign currency losses of $3 million were included in foreign
E&P net operating income in the first quarter of 2000, compared
with a gain of $1 million in the first quarter of 1999.
Foreign crude oil production was 14 percent higher in the first
quarter of 2000, due to new production in the Timor Sea and
Denmark, and higher production in Norway. Foreign natural gas
production increased 3 percent, primarily due to new natural gas
production in Nigeria.
Special items in the first quarter of 2000 primarily included a
deferred tax adjustment and a net gain on property dispositions.
18
<PAGE>
GPM
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $ 51 6
Less special items (6) (1)
- -----------------------------------------------------------------
Net operating income $ 57 7
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices
U.S. residue gas
(per thousand cubic feet) $ 2.40 1.68
U.S. natural gas liquids
(per barrel--unfractionated) 19.48 7.89
- -----------------------------------------------------------------
Millions of
Cubic Feet Daily
-------------------
Operating Statistics
Natural gas purchases 1,516 1,360
- -----------------------------------------------------------------
Raw gas throughput 1,824 1,700
- -----------------------------------------------------------------
Residue gas sales 1,030 938
- -----------------------------------------------------------------
Thousands of
Barrels Daily
-------------------
Natural gas liquids sales 162 146
- -----------------------------------------------------------------
Net operating income from the company's GPM segment increased
714 percent in the first quarter of 2000, reflecting a sharp
increase in natural gas liquids prices. GPM's average sales
price for natural gas liquids was $19.48 per barrel in the first
quarter of 2000, compared with $7.89 per barrel in the first
quarter of 1999. Natural gas liquids prices generally follow the
change in crude oil prices, which were also substantially higher
in the quarter. Residue gas prices increased 43 percent in the
first quarter of 2000, averaging $2.40 per thousand cubic feet.
Also contributing to the improved operating earnings were
increased volumes. Raw gas throughput, residue gas sales, and
natural gas liquids sales volumes increased 7 percent,
10 percent and 11 percent, respectively.
19
<PAGE>
On March 31, 2000, Phillips closed the transaction combining its
GPM assets with those of Duke Energy Corporation into a new
company, Duke Energy Field Services. At the close of business
March 31, 2000, Phillips' GPM segment consisted primarily of its
equity investment in Duke Energy Field Services. In the future,
Phillips will continue to report a separate GPM operating
segment.
GPM's special items in the first quarters of 2000 and 1999
consisted of work force reduction charges.
20
<PAGE>
RM&T
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income (loss) $ 23 (8)
Less special items (4) (2)
- -----------------------------------------------------------------
Net operating income (loss) $ 27 (6)
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices (per gallon)
Automotive gasoline
Wholesale $.86 .42
Retail .99 .56
Distillates .81 .37
- -----------------------------------------------------------------
Thousands of
Barrels Daily
-------------------
Operating Statistics
U.S. refinery crude oil
Capacity 360 355
Crude runs 345 336
Capacity utilization (percent) 96% 95
Natural gas liquids fractionation
Capacity 252 252
Processed 212 205
Capacity utilization (percent) 84% 81
Refinery and natural gas liquids production 589 569
- -----------------------------------------------------------------
Petroleum products outside sales
United States
Automotive gasoline
Branded 229 229
Unbranded 33 41
Spot 29 14
Aviation fuels 38 27
Distillates
Wholesale and retail 107 108
Spot 29 30
Natural gas liquids (fractionated) 142 135
Other products 35 39
- -----------------------------------------------------------------
642 623
Foreign 44 35
- -----------------------------------------------------------------
686 658
=================================================================
21
<PAGE>
Net operating income from the company's RM&T segment was
$27 million in the first quarter of 2000, compared with a net
operating loss of $6 million in the corresponding quarter of
1999. The improvement was mainly the result of higher gasoline
and distillates margins across the RM&T business: from refining
to wholesale marketing to retail sales at the pump. Higher
refinery gasoline and distillates production volumes also
contributed to the improved RM&T results. These items were
partially offset by lower margins on other refinery products and
higher controllable costs. Controllable costs were higher than a
year ago due primarily to increased fuel and utility costs
associated with higher natural gas prices.
Effective January 1, 2000, Phillips raised its crude oil
processing capacity from 355,000 barrels per day to 360,000
barrels per day. However, even with the increased crude oil
processing capacity, the company's refineries ran at 96 percent
of rated crude oil processing capacity in the first quarter of
2000, compared with 95 percent in the first quarter of 1999.
Special items in the first quarter of 2000 included contingency-
related charges. Special items in the first quarter of 1999
included work force reduction charges, partially offset by a net
gain on asset sales.
22
<PAGE>
Chemicals
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $26 29
Less special items (2) 7
- -----------------------------------------------------------------
Net operating income $28 22
=================================================================
Millions of Pounds
-------------------
Operating Statistics
Production*
Ethylene 890 702
Polyethylene 562 659
Propylene 131 123
Polypropylene 104 126
Paraxylene 180 107
- -----------------------------------------------------------------
*Includes Phillips' share of equity affiliates' production.
Net operating income from the company's Chemicals segment
increased 27 percent in the first quarter of 2000, primarily due
to higher olefins/polyolefins and aromatics margins, along with
higher olefins sales volumes. These items were partially offset
by lower specialty chemicals and specialty plastics margins.
Polyethylene and polypropylene production volumes decreased
15 percent and 17 percent, respectively, in the first quarter of
2000, primarily due to scheduled maintenance turnarounds at the
Houston Chemicals Complex (HCC) in February. In late March 2000,
the company's K-Resin styrene-butadiene copolymer facilities were
damaged by an explosion and fire. In addition to halting
production of K-Resin, the entire Houston Chemical Complex was
shutdown as well. With the exception of K-Resin, production at
HCC resumed in early April 2000. Resumption of K-Resin
production at HCC has been delayed indefinitely.
Special items in the first quarter of 2000 related to the K-Resin
plant accident. Special items in the first quarter of 1999
included a positive contingency settlement, partially offset by
work force reduction charges.
23
<PAGE>
Corporate and Other
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2000 1999
-------------------
Operating Results
Reported Corporate and Other $(91) (47)
Less special items (27) 27
- -----------------------------------------------------------------
Adjusted Corporate and Other $(64) (74)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(18) (20)
Net interest (43) (46)
Preferred dividend requirements (11) (10)
Other items 8 2
- -----------------------------------------------------------------
Adjusted Corporate and Other $(64) (74)
=================================================================
Corporate general and administrative expenses decreased
10 percent in the first quarter of 2000, reflecting lower
depreciation retained at Corporate. The assets related to the
company's new business computing systems were allocated to the
operating segments in December 1999.
Net interest represents interest income and expense, net of
capitalized interest. Net interest decreased 7 percent,
primarily resulting from higher capitalized interest in the first
quarter of 2000.
Preferred dividend requirements represent dividends on the
preferred securities of the Phillips 66 Capital I and II trusts.
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 improved in the first quarter of 2000 due to
lower foreign currency losses. Other items were positively
impacted in both the first quarter of 2000 and 1999 by dividends
of $9 million and $16 million, respectively, after-tax, received
from a mutual insurance company in which Phillips owns a stock
interest.
Special items in the first quarter of 2000 primarily included
costs related to the K-Resin facility accident that were insured
by the company's captive insurance subsidiary. Special items in
the first quarter of 1999 primarily consisted of a $24 million
favorable resolution of prior years' U.S. income tax issues.
24
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-------------------------------
At At At
March 31 December 31 March 31
2000 1999 1999
-------------------------------
Current ratio 1.0 1.1 1.2
Total debt $3,969 4,302 4,607
Company-obligated mandatorily
redeemable preferred securities $ 650 650 650
Common stockholders' equity $4,705 4,549 4,205
Percent of total debt to capital* 43% 45 49
Percent of floating-rate debt
to total debt 21% 27 31
- -----------------------------------------------------------------
*Capital includes total debt, company-obligated mandatorily
redeemable preferred securities and common stockholders' equity.
At March 31, 2000, $1 billion of securities remained available
under the company's shelf registration statement previously filed
with the U.S. Securities and Exchange Commission (SEC). In
April 2000, the company filed a universal shelf registration
statement with the SEC for an additional $5 billion of various
types of debt and equity securities, and securities convertible
into either. This registration statement became effective
April 27, 2000. Securities to be issued under this universal
shelf registration statement can be combined by prospectus with
the $1 billion of securities that remained under the earlier shelf
registration statement. As a result, the company has available,
to issue and sell, a total of $6 billion of the various types
of securities offered under the universal shelf registration
statement.
In March 2000, the company closed on a new 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 $300 million, all of which was outstanding at March 31,
2000. Terms of the new agreement are similar to those of the
company's previous receivable-sales agreements.
Cash from operations in the first quarter of 2000 increased
$601 million from the same period in 1999, primarily the result
of a $267 million increase in net operating income and decreases
in non-cash working capital. The sale of accounts receivable
under the previously mentioned receivables monetization program
increased cash from operations by $109 million more than they did
in the same period in 1999.
25
<PAGE>
Phillips has $200 million available under three master leasing
arrangements, under which it leases and supervises the
construction of retail marketing outlets. At March 31, 2000,
approximately $118 million had been financed under these
arrangements.
During the first three months of 2000, cash balances decreased
$7 million. Cash of $770 million was provided by operating
activities. Funds were used to retire revolving debt, support
the company's capital expenditures program, and pay dividends.
At March 31, 2000, there was no revolving debt outstanding under
the company's $1.5 billion revolving credit facility, but
$242 million of commercial paper was outstanding. Also, Phillips
Petroleum Company Norway has $600 million available under two
revolving credit facilities. At March 31, 2000, $130 million was
outstanding under the facilities.
On March 31, 2000, the company combined its gas gathering,
processing and marketing assets with the gas gathering and
processing business of Duke Energy Corporation in a new
company, Duke Energy Field Services. In connection with the
closing, Phillips received $1.22 billion in cash on April 3,
2000. See "Capital Expenditures and Investments" on page 27 for
additional information on this transaction.
On February 7, 2000, the company announced that it had signed a
letter of intent with Chevron Corporation (Chevron) to combine
the two companies' worldwide chemicals businesses, other than the
Oronite additives business being retained by Chevron, into a
50/50 joint venture. The transaction is expected to close in mid-
2000. See "Outlook" on page 32 for additional information on
this transaction.
Effective April 26, 2000, Phillips entered into a new
$6.5 billion revolving credit facility, which is a 364-day
facility with terms similar to the company's existing
$1.5 billion revolving credit facility. The commitments under
the new facility are automatically reduced by the amount of the
proceeds received from the previously mentioned GPM and Chemicals
joint ventures, and any bond issuance. Since the proceeds from
the GPM joint venture have already been received, the commitment
under the new revolving credit facility is currently
$5.3 billion. The company's commercial paper program is
supported by both revolving credit facilities in an amount equal
to 100 percent of the commercial paper outstanding.
26
<PAGE>
Capital Expenditures and Investments
On December 13, 1999, Phillips' Board of Directors approved a
$1.79 billion capital spending program. Since then, the
company's GPM assets have been contributed to a joint venture,
and the company has announced that it expects to contribute its
Chemicals assets to a joint venture in mid-2000. The capital
programs of these joint-venture companies are expected to be
self-funded, and not part of Phillips' capital spending program.
The Board has approved the necessary funding to purchase Arco's
Alaskan businesses and to fund their ongoing capital spending
program for the remainder of the year. Giving consideration to
current initiatives, the company is currently formulating a revised
estimate of its capital spending for the remainder of 2000.
On March 31, 2000, the company closed the transaction to combine
its midstream gas gathering, processing and marketing assets with
the gas gathering and processing business of Duke Energy
Corporation (Duke Energy) forming a new company, Duke Energy
Field Services. Duke Energy Field Services arranged debt
financing and on April 3, 2000, made one-time cash distributions
to both Duke Energy and Phillips. Phillips received $1.22 billion.
Duke Energy owns about 70 percent of the new company, and Phillips
owns about 30 percent. At the close of business March 31, 2000,
Phillips began accounting for its investment in the new company on
an equity basis.
Subject to market conditions, Duke Energy Field Services plans to
offer approximately 20 percent of its equity to the public in an
initial public offering (IPO). The proceeds of the offering are
expected to be used to reduce the debt incurred by the new
company in the transaction. The agreements governing Duke Energy
Field Services set forth a formula which adjusts Duke Energy's
and Phillips' post-IPO equity interests based on the public
market valuation of the new company. Assuming a value range for
the new company of between $5 billion and $6 billion, Duke
Energy's post-IPO equity ownership in the new company would range
between 55 percent and 57 percent, while Phillips' post-IPO
ownership would range between 23 percent and 25 percent.
On April 13, 2000, Phillips, BP Amoco p.l.c. (BP), Atlantic
Richfield Company (ARCO), and Exxon Mobil Corporation (Exxon
Mobil) entered into agreements to align the ownership and
operation of the Prudhoe Bay Unit in Alaska. The agreements,
which were subject to the completion of the BP-ARCO merger
that occurred April 18, 2000, alter the respective equity
interests of Exxon Mobil, BP and Phillips in the Prudhoe Bay
Unit, and provide for BP to become the single operator there.
27
<PAGE>
Phillips will still be operator of the North Slope Kuparuk and
Alpine fields. After this alignment, Phillips will have
approximately 36 percent ownership in both the oil rim and gas
cap portions of the Prudhoe Bay Unit. The agreements resolve the
issues that resulted in legal action taken March 24, 2000, by
Exxon Mobil, relating to North Slope preferential rights and
field operatorship.
On April 26, 2000, the company completed the purchase of all of
ARCO's Alaskan businesses, other than three double-hulled tankers
currently under construction and certain pipeline assets. The
pipeline assets are subject to other owners' preferential rights
and the approval of the Regulatory Commission of Alaska. The
preferential rights on the pipeline assets were not exercised, so
Phillips plans to file its request for permission to transfer
ownership of the pipelines in the near future. The three tankers
under construction are subject to the grant of consents to
certain construction contract assignments. The company expects
to complete the acquisition of the tankers and pipeline assets
late in the second or early in the third quarter of 2000. The
transaction was effective January 1, 2000, and the activity from
that date until April 26, 2000, adjusted the purchase price.
Using the proceeds generated from the GPM joint venture, along
with new debt financing ($4.5 billion of commercial paper bearing
an average interest rate of 6.31 percent), Phillips paid
approximately $5.5 billion in cash at closing on April 26. The
company expects to pay approximately $700 million and assume
approximately $300 million of ARCO long-term debt upon the
closing of the purchase of the three tankers under construction
and the pipeline assets. Under the terms of the purchase
agreement, Phillips could have to pay up to $500 million more
over the next five years. Formula-based contingent monthly
payments are required when New York Mercantile Exchange West
Texas Intermediate crude oil prices exceed $25 per barrel. The
payment made on April 26, 2000, included $73 million for these
formula-based payments for the three-month period ending
March 31, 2000, leaving $427 million that may have to be paid.
There may be purchase price adjustments later in 2000 after an
audit of the preliminary estimates of the cash flows generated by
the purchased Alaskan businesses prior to closing, and after the
calculation of the fair value of the crude oil inventory on hand
at April 26 is finalized.
As a result of this transaction, in 2000 Phillips expects to add
reserves of approximately 2.2 billion barrels of oil equivalent,
doubling the company's year-end 1999 reserves. Average net
production from the acquired assets is expected to be
340,000 barrels of oil equivalent per day in 2000. Phillips
received value for the production from January 1, 2000, to the
date of closing April 26, 2000, related to that period, but the
volumes will not be reflected in the company's reported
production statistics for 2000.
28
<PAGE>
This transaction represents a significant step in the company's
growth strategy for its E&P business, with Phillips gaining a
substantial ownership position in the two largest fields in North
America--Prudhoe Bay and Kuparuk. Phillips expects the
transaction to be accretive to both earnings and cash flow in
2000.
Based on a preliminary purchase price allocation and recent
market outlooks on crude oil prices for the remainder of 2000,
the company expects that the acquired ARCO businesses will add,
for the partial year after closing, approximately $280 million of
net income and approximately $635 million of cash from
operations.
The company completed its appraisal drilling program in the first
quarter of 2000 on the Peng Lai 19-3 discovery in block 11/05 of
China's Bohai Bay. A multiple-phase development is planned. In
this plan, Phase I would utilize one wellhead platform and a
floating production storage and offloading facility, with daily
gross production rates expected to reach 30,000 to 40,000 barrels
of oil. First production from Phase I is scheduled for the
fourth quarter of 2001. Phase II would include multiple wellhead
platforms, central processing facilities and a pipeline or
floating storage and offloading facility. First production from
Phase II is targeted for 2005, building to a plateau rate of
100,000 to 130,000 gross barrels of oil per day.
Together, these phases are expected to develop approximately
500 million barrels of recoverable reserves. The balance of the
expected ultimate recovery potential would be developed by
incorporating flank areas and using enhanced recovery methods.
Phillips' large acreage position in Block 11/05 provides the
company with significant additional exploration opportunities. A
minimum of four exploratory wells in this block are planned in
2000. Phillips acquired the right to explore Block 11/05 in 1994
when a petroleum contract was signed with China National Offshore
Oil Corporation (CNOOC). Phillips has a 100 percent interest in
the block, but CNOOC has the right to participate in any
development in the block with up to a 51 percent interest.
Phillips and the Venezuelan state oil company, Petroleos de
Venezuela S.A., each hold a 50 percent interest in Merey Sweeny,
L.P. (MSLP), the limited partnership that is building a
58,000-barrel-per-day delayed coker and related facilities at
Phillips' Sweeny Complex. The coker is scheduled to start up in
the third quarter of 2000. The total project cost for the coker
and related facilities has been estimated at $538 million. In
April 2000, the Brazos River Navigation District of Brazoria
County, Texas, issued $25 million of Texas Environmental
Facilities Revenue Bonds (Merey Sweeny, L.P. Project) in two
series (A and B) of $12.5 million each. Phillips entered into a
29
<PAGE>
letter of credit reimbursement agreement with the Chase Manhattan
Bank for the amount of the Series A Bonds. Remaining
expenditures are being funded by the limited partnership through
a previous bond financing, an $80 million bank facility and
equity contributions.
During the first quarter of 2000, Phillips and its co-venturer in
the Seaway Pipeline Company (Seaway) completed a 130,000-barrel-
per-day capacity expansion of Seaway's 30-inch crude oil
pipeline. The expansion has been placed in service.
On March 27, 2000, an explosion and fire occurred at the K-Resin
styrene-butadiene copolymer plant at the company's Houston
Chemical Complex (HCC). This incident is unrelated to a flash
fire that occurred at this location June 23, 1999. Both internal
and external investigations into the incident continue and the
timing required to complete all investigations is currently
unknown. A preliminary damage assessment related to the plant
is estimated at $22 million.
The company's polyolefins facilities at HCC were shutdown during
the incident and production from these facilities resumed a few
days after the incident.
HCC had capacity to produce 370 million pounds a year of K-Resin
styrene-butadiene copolymer prior to the incident. Phillips has
notified its K-Resin customers that it will continue the force
majeure declared from the June 1999 incident. At this time, it
has not been determined when the plant might resume production.
At March 31, 2000, $91 million had been drawn by Qatar Chemical
Company Ltd. (Q-Chem) under the $750 million bank financing
agreement for the construction of a major petrochemical complex
in Qatar. Phillips owns 49 percent of Q-Chem. When the expected
combination of the company's worldwide chemicals businesses with
those of Chevron occurs, Q-Chem will become an equity affiliate
of the new joint venture company.
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.
30
<PAGE>
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 two new sites were added. Of these 27 sites,
the company believes it has a legal defense or its records
indicate no involvement for five sites. At four other 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
13 remaining sites, the company has provided for any probable
costs that can be reasonably estimated.
Phillips does not consider the number of sites at which it has
been designated potentially responsible by state or federal
agencies as a relevant measure of liability. Some companies may
be involved in few sites but have much larger liabilities than
companies involved in many more sites. Although liability of
those potentially responsible is generally joint and several for
federal sites and frequently so for state sites, the company is
usually but one of many companies cited at a particular site. It
has, to date, been successful in sharing 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.
31
<PAGE>
At March 31, 2000, $4 million had been accrued for the company's
unresolved PRP sites. In addition, the company has accrued
$50 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 $3 million for other
environmental contingent liabilities, for total environmental
accruals of $57 million.
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.
OUTLOOK
The proposed joint venture combining the worldwide chemicals
businesses of Phillips and Chevron has been approved by the
companies' Boards of Directors and the U.S. Federal Trade
Commission. Subject to the signing of definitive agreements and
other regulatory review and approval, the transaction is expected
to close in mid-2000. Phillips expects to account for its
investment in the joint venture on an equity basis.
Phillips operates in three countries where cutbacks in production
were announced in 1998. The Norwegian Ministry of Petroleum and
Energy has reduced the production curtailment measures for oil
production on the Norwegian continental shelf, but has extended
the curtailment through June 2000. It will amount to a
3.3 percent reduction, based on latest production forecasts given
to the Ministry. The Nigerian government raised their quota,
effective May 1, 2000, reversing all previous quota reductions.
This affects leases operated on behalf of the company under
the joint operating agreement with Nigerian Agip Oil Company.
Venezuela, an OPEC member, has agreed to cut back oil
production, but Phillips' third-bid-round operations have not
been asked to curtail production. Based on the above, the
company does not expect the economic impact of these announced
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.
In March 1999, several major oil-exporting countries agreed to
reduce production volumes. Within a year, crude oil prices
peaked at their highest levels since the 1991 Gulf War. The
producing countries agreed in March 2000 to increase their output
quotas and are asserting a policy of supporting price stability.
Price volatility may be expected for 2000 and beyond depending on
the balance of supply and demand. Natural gas prices continue to
32
<PAGE>
rise, helped by concerns of potentially lower supply, as well as
by the strength of crude oil prices. Continued volatility
created by weather, gas storage levels, and the price of
competing fuels is expected.
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 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 implement 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 the Chemicals 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; consummation of the
remaining portion of the ARCO Alaska acquisition by E&P; the
successful development of the company's current projects and
new acquisitions discussed in this report and subsequent
reports; and the achievement of production estimates, and
cost savings and synergies that are dependent on the
integration of personnel, business systems and operations.
33
<PAGE>
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; its ability to engage drilling,
construction and other contractors; 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-acquired
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, 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 and work force. 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, including the
initial public offering contemplated for a portion of the
Duke Energy Field Services stock and the sale of notes to
refinance a portion of the bank debt for the ARCO Alaska
acquisition, 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 to be
sold; changes in the commodity prices of the company's basic
products of oil, natural gas and natural gas liquids, over
which Phillips has no control, and to a lesser extent the
commodity prices for its chemicals and other products; its
ability to operate its refineries, chemical plants, and
exploration and production operations consistently and
safely; 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.
34
<PAGE>
o Estimates of proved reserves, raw natural gas supplies,
project cost estimates, and planned spending for maintenance
and environmental remediation were developed by company
personnel using the latest available information and data,
and recognized techniques of estimating, including those
prescribed by the 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.
o Estimates of increases in net income and cash flow from the
acquired ARCO businesses for the partial year 2000 are based
on West Texas Intermediate crude oil prices of approximately
$24.50 per barrel on average, adjusted for the North Slope
differential and transportation; operating costs for such
businesses and the company not increasing substantially
beyond current levels; and no major disruption in production
or transportation of such products.
35
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
Reports on Form 8-K
- -------------------
During the three months ended March 31, 2000, the company filed
two reports on Form 8-K.
The first report was filed February 10, 2000, to report in Item 5
the company's February 4 announcement that it had entered into a
letter of intent to form a chemicals joint venture with Chevron
Corporation.
The second report was filed February 15, 2000, disclosing in
Item 5 the company's announcement that during 1999 its worldwide
proved reserves increased to 2.23 billion barrels of oil
equivalent, up slightly from 2.21 billion barrels of oil
equivalent at year-end 1998. The company replaced 114 percent of
its 1999 worldwide hydrocarbon production.
36
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PHILLIPS PETROLEUM COMPANY
/s/ Rand C. Berney
---------------------------------
Rand C. Berney
Vice President and Controller
(Chief Accounting and Duly
Authorized Officer)
May 11, 2000
37
<PAGE>
Exhibit 12
PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES TOTAL
ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars
---------------------------
Three Months Ended March 31
2000 1999
---------------------------
(Unaudited)
Earnings Available for Fixed Charges
Income before income taxes $542 99
Distributions in excess of (less than)
equity in earnings of less-than-
fifty-percent-owned companies 2 (6)
Fixed charges, excluding capitalized
interest* 95 100
- -------------------------------------------------------------------------
$639 193
=========================================================================
Fixed Charges
Interest and expense on indebtedness,
excluding capitalized interest $ 65 71
Capitalized interest 16 9
Preferred dividend requirements of
capital trusts 13 13
Interest portion of rental expense 12 11
- -------------------------------------------------------------------------
$106 104
=========================================================================
Ratio of Earnings to Fixed Charges 6.0 1.9
- -------------------------------------------------------------------------
*Includes amortization of capitalized interest totaling approximately
$5 million in both 2000 and 1999.
Earnings available for fixed charges include, if any, the company's equity
in losses of companies owned less than 50 percent and having debt for
which the company is contingently liable. Fixed charges include the
company's proportionate share, if any, of interest relating to the
contingent debt.
In 1990 and 1988, respectively, the company guaranteed a $400 million bank
loan and $250 million of notes payable for the Long-Term Stock Savings
Plan (LTSSP), an employee benefit plan. In 1994, the notes payable were
refinanced with a $131 million term loan, which was repaid in June 1998.
The $400 million loan was amended in 1994, 1995, and again in 1997.
Consolidated interest expense included a minimal amount of interest
related to LTSSP borrowings in both the first quarter of 2000 and 1999.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated balance sheet of Phillips Petroleum Company as of
March 31, 2000, and the related consolidated statement of income
for the three months ended March 31, 2000, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 131
<SECURITIES> 0
<RECEIVABLES> 1,659
<ALLOWANCES> 22
<INVENTORY> 570
<CURRENT-ASSETS> 2,638
<PP&E> 20,413
<DEPRECIATION> 10,418
<TOTAL-ASSETS> 15,062
<CURRENT-LIABILITIES> 2,601
<BONDS> 3,889
650
0
<COMMON> 320
<OTHER-SE> 4,385
<TOTAL-LIABILITY-AND-EQUITY> 15,062
<SALES> 4,735
<TOTAL-REVENUES> 4,768
<CGS> 3,887<F1>
<TOTAL-COSTS> 3,949<F2>
<OTHER-EXPENSES> 13<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 542
<INCOME-TAX> 292
<INCOME-CONTINUING> 250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 250
<EPS-BASIC> .99
<EPS-DILUTED> .98
<FN>
<F1> Purchased crude oil and products + Production and operating expenses +
Exploration expenses + Depreciation, depletion and amortization.
<F2> CGS + Taxes other than income taxes.
<F3> Preferred dividend requirements of capital trusts.
</FN>
</TABLE>
