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, 1996
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -------------------
Commission file number 1-11594
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PHILLIPS GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-1395482
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
First Interstate Tower, Suite 800
1300 Post Oak Boulevard, Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
713-297-6066
(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 1,000 shares of common stock, $.01 par value, outstanding
at October 31, 1996
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Operations Phillips Gas Company
Thousands of Dollars
----------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------
1996 1995 1996 1995
----------------------------------------
Revenues
Natural gas liquids $196,300 130,897 521,999 396,244
Residue gas 201,136 125,790 606,420 390,983
Other 19,240 10,919 56,017 31,529
- ---------------------------------------------------------------------
Total Revenues 416,676 267,606 1,184,436 818,756
- ---------------------------------------------------------------------
Costs and Expenses
Gas purchases 297,530 184,760 842,992 564,404
Operating expenses 43,996 53,247 127,881 161,327
Selling, general and
administrative expenses 2,789 8,832 11,109 23,608
Depreciation 18,149 18,872 55,321 54,201
Interest expense 5,978 5,260 18,200 13,860
- ---------------------------------------------------------------------
Total Costs and Expenses 368,442 270,971 1,055,503 817,400
- ---------------------------------------------------------------------
Income (loss) before income
taxes 48,234 (3,365) 128,933 1,356
Provision for income taxes 18,972 (1,625) 50,381 (5)
- ---------------------------------------------------------------------
Net Income (Loss) 29,262 (1,740) 78,552 1,361
Preferred stock dividend
requirements 8,039 8,039 24,116 24,116
- ---------------------------------------------------------------------
Net Income (Loss) Applicable
to Common Stock $ 21,223 (9,779) 54,436 (22,755)
=====================================================================
See Notes to Financial Statements.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Gas Company
Thousands of Dollars
--------------------------
September 30 December 31
1996 1995
--------------------------
Assets
Cash and cash equivalents $ 65,242 53,800
Accounts receivable
Affiliate 75,178 55,376
Trade (less allowances:
1996--$905; 1995--$962) 91,756 74,350
Inventories 7,315 6,791
Deferred income taxes 3,747 12,181
Prepaid expenses and other current
assets 1,505 2,467
- -----------------------------------------------------------------
Total Current Assets 244,743 204,965
Investments and long-term receivables 19,236 15,943
Properties, plants and equipment (net) 860,031 875,023
Deferred income taxes 29,053 57,332
Deferred gathering fees 26,246 19,905
- -----------------------------------------------------------------
Total $1,179,309 1,173,168
=================================================================
Liabilities
Accounts payable
Affiliate $ 34,493 50,458
Trade 184,300 157,618
Accrued income and other taxes 18,623 15,787
Other accruals 122 264
- -----------------------------------------------------------------
Total Current Liabilities 237,538 224,127
Long-term debt due to affiliate 340,000 400,000
Other liabilities and deferred credits 5,558 6,452
Deferred gain on sale of assets 18,672 19,484
- -----------------------------------------------------------------
Total Liabilities 601,768 650,063
- -----------------------------------------------------------------
Stockholders' Equity
Preferred stock--100 million shares
authorized at $.01 par value; issued
and outstanding--13,800,000 shares,
liquidation preference:
1996--$349,198; 1995--$349,109 345,000 345,000
Common stock--200 million shares
authorized at $.01 par value
Issued and outstanding--1,000 shares
Par value - -
Capital in excess of par 142,917 142,917
Retained earnings 89,624 35,188
- -----------------------------------------------------------------
Total Stockholders' Equity 577,541 523,105
- -----------------------------------------------------------------
Total $1,179,309 1,173,168
=================================================================
See Notes to Financial Statements.
2
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Cash Flows Phillips Gas Company
Thousands of Dollars
--------------------
Nine Months Ended
September 30
--------------------
1996 1995
--------------------
Cash Flows from Operating Activities
Net income $ 78,552 1,361
Adjustments to reconcile net income
to net cash provided by operating
activities
Non-working capital adjustments
Depreciation 55,321 54,201
Deferred taxes 28,279 5,812
Deferred gathering fee (6,341) (6,811)
Gain on sale of assets (4,131) (826)
Other (1,314) (4,832)
Working capital adjustments
Decrease (increase) in accounts
receivable (37,208) 11,684
Increase in inventories (524) (920)
Decrease (increase) in prepaid expenses
and other current assets 9,396 (6,372)
Increase (decrease) in accounts payable 10,717 (22,911)
Increase (decrease) in taxes and other
accruals 2,694 (6,639)
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 135,441 23,747
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments (47,308) (115,877)
Proceeds from asset dispositions 7,425 7,549
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (39,883) (108,328)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Preferred stock dividend (24,116) (24,116)
Issuance of debt - 105,000
Repayment of debt (60,000) -
- -----------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities (84,116) 80,884
- -----------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents 11,442 (3,697)
Cash and cash equivalents at beginning
of year 53,800 33,196
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 65,242 29,499
=================================================================
See Notes to Financial Statements.
3
<PAGE>
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Gas 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 that Phillips Gas
Company (hereinafter referred to as "PGC" or "the company")
considers necessary for a fair statement of the results for such
periods. All such adjustments are of a normal and recurring
nature.
Note 2--Accounting Change
Effective January 1, 1996, the company changed its method of
accounting for the depreciation of its natural gas plants and
systems from the unit-of-production method to the straight-line
method, using an estimated life of 20 years for most of these
assets. This change was made to better reflect how the assets
are expected to be used over time, to provide a better matching
of revenues and expenses, and to be consistent with prevalent
industry practice. As a result of the change, net income for the
three- and nine-month periods ending September 30, 1996,
benefited $4,600,000 and $12,600,000, respectively. The
estimated cumulative effect of the change was not material.
Note 3--Inventories
Inventories consisted of the following:
Thousands of Dollars
--------------------------
September 30 December 31
1996 1995
--------------------------
Natural gas $2,078 923
Helium 1,782 1,782
Materials, supplies and other 3,455 4,086
- -----------------------------------------------------------------
$7,315 6,791
=================================================================
4
<PAGE>
Note 4--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Thousands of Dollars
--------------------------
September 30 December 31
1996 1995
--------------------------
Properties, plants and equipment
(at cost) $1,913,339 1,888,512
Less accumulated depreciation
and amortization 1,053,308 1,013,489
- -----------------------------------------------------------------
$ 860,031 875,023
=================================================================
Note 5--Investments and Long-Term Receivables
In July 1996, the company signed a purchase agreement with Amoco
Production Company (Amoco) to acquire certain gas gathering
assets and Amoco's interest in a gas plant, both of which
are located in the Permian Basin of West Texas, subject to
governmental and regulatory approval. Long-term receivables
includes a $4 million earnest payment made in the third quarter
1996, related to this pending acquisition. The earnest payment
is fully refundable to the company under certain conditions.
Note 6--Income Taxes
The company's effective tax rate for each of the three- and nine-
month periods ended September 30, 1996, was 39 percent, compared
with 48 percent and less than 1 percent for the respective periods
a year ago. The mix of individual subsidiary company profit and
loss within PGC for the three- and nine-month periods, coupled with
differing state tax rates, caused the consolidated tax rates to
vary from period to period.
Note 7--Contingencies
In the case of all known contingencies, the company accrues an
undiscounted liability when a loss is probable and the amount can
be reasonably estimated. These liabilities are not reduced for
potential insurance recoveries. If applicable, undiscounted
receivables are accrued for probable insurance recoveries.
Currently the company is a party to a number of legal proceedings
pending in various courts or agencies for which no provision has
been made. 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.
5
<PAGE>
Note 8--Related Party Transactions
Significant transactions with affiliated parties were:
Thousands of Dollars
--------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
------------------ -----------------
Operating revenues $200,495 159,998 544,642 477,879
Gas purchases 31,576 24,935 93,625 75,718
Operating expenses 27,658 33,703 81,037 101,840
Selling, general and
administrative expenses 2,301 8,623 9,985 21,381
Interest income 801 197 1,393 387
Interest expense 5,950 5,227 18,170 13,706
- -----------------------------------------------------------------
The company purchases raw gas from, and sells a portion of its
residue gas and substantially all of its natural gas liquids
(NGL) to, Phillips Petroleum Company (Phillips). Phillips also
provides the company with various field and general
administrative services. The company earns interest from
participation in Phillips' centralized cash management system and
incurs interest expense on its borrowings from Phillips. In
addition, the company purchases Phillips plastic pipe, which is
used in the construction of gathering systems.
The company pays gathering fees to GPM Gas Gathering L.L.C.
(GGG). In the third quarters of 1996 and 1995, net fees paid to
GGG for gas gathering services were $10,618,000 and $13,136,000,
respectively; $8,420,000 and $10,924,000 were expensed. For the
nine-month periods ended September 30, 1996 and 1995, net fees
paid were $31,703,000 and $39,742,000, respectively; $25,362,000
and $32,931,000 were expensed.
Note 9--Keep Well Agreement
Under the terms of a Keep Well Agreement between the company and
Phillips, the company had been prohibited from incurring debt
other than debt owed to Phillips and its affiliates. The
agreement also required Phillips to make equity infusions so that
the company's consolidated debt would not exceed 60 percent of its
total capitalization. In July 1996, the rating of Phillips'
long-term debt was upgraded to a rating that, under the terms of
the Keep Well Agreement, terminated these provisions of the Keep
Well Agreement. Other provisions of the Keep Well Agreement
remain in full force and effect.
6
<PAGE>
Note 10--Cash Flow Information
Cash payments for interest and income taxes for the nine-month
periods ended September 30 were as follows:
Thousands of Dollars
--------------------
1996 1995
--------------------
Cash payments
Interest $18,361 13,830
Income taxes 11,473 3,405
- -----------------------------------------------------------------
7
<PAGE>
- -----------------------------------------------------------------
Management's Discussion and Analysis Phillips Gas Company
RESULTS OF OPERATIONS
The company had net income of $29 million in the third quarter of
1996, compared with a $2 million net loss in the corresponding
period during 1995. Net income for first nine months of 1996 was
$79 million, compared with $1 million for the same period in
1995.
Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
------------------ ----------------
Reported net income (loss) $29 (2) 79 1
Less non-operating items (3) (5) (7) (10)
- -----------------------------------------------------------------
Net operating income $32 3 86 11
=================================================================
Net operating income increased $29 million and $75 million for
the third quarter and first nine months of 1996, respectively,
compared with the same periods in 1995. The improvements were
mainly the result of improved margins due to higher natural gas
liquids (NGL) and residue gas sales prices, and increased raw gas
throughput volumes, which increased residue gas and NGL sales
volumes and gathering fees. Lower operating and selling, general
and administrative expenses also contributed to the increase in
net operating income.
Non-operating items include interest income and expense, a gain
on the sale of a plant and gathering system in the second quarter
of 1996, and severance cost adjustments in the third quarters of
1996 and 1995.
8
<PAGE>
Three Months Ended Nine Months Ended
September 30 September 30
Sales, Purchases and --------------------- -------------------
Throughput Statistics 1996 1995 Change 1996 1995 Change
--------------------- -------------------
Natural gas liquids
sales (thousands
of barrels daily) 152 147 3% 147 145 1%
Residue gas sales
(millions of cubic
feet daily) 1,073 1,018 5 1,078 1,017 6
Average sales prices
Natural gas liquids
(per barrel) $14.05 9.66 45 12.93 9.98 30
Residue gas (per
thousand cubic
feet) $ 2.04 1.34 52 2.05 1.41 45
Natural gas purchases
(millions of cubic
feet daily) 1,570 1,455 8 1,548 1,442 7
Raw gas throughput
(millions of cubic
feet daily) 1,930 1,650 17 1,920 1,619 19
- -----------------------------------------------------------------
Revenues
As a result of low NGL inventories, curtailed supplies and
increased demand for NGL feedstocks for production of
petrochemicals, NGL prices have increased compared with the same
periods in 1995. NGL sales volumes have continued to improve
through the third quarter of 1996, mainly due to higher NGL
extractions and operating consistency at the company's Linam
Ranch plant in New Mexico, and the December 1995 acquisition of
Anadarko Basin gathering assets.
Residue gas sales prices remained strong in the third quarter of
1996, even though prices began to soften in September 1996. The
continued effect of lower storage levels and higher demand has
resulted in higher prices in 1996, compared with 1995. The
increase in residue gas sales volumes was primarily the result of
the December 1995 acquisition of gathering assets.
Other revenue increased $8 million and $24 million for the third
quarter and first nine months of 1996, respectively, compared
with the same periods in 1995 due to increased gathering and by-
product revenues. The first nine months of 1996 also benefited
from a gain on the sale of a small, non-strategic plant and
gathering system in Oklahoma during the second quarter of 1996.
9
<PAGE>
Expenses
Gas purchase costs increased $113 million and $279 million for
the third quarter and first nine months of 1996, respectively,
compared with the same periods in 1995. Gas purchase costs were
72 percent of operating revenue for the third quarter and the
first nine months of 1996, respectively, compared with 69 percent
for the same periods in 1995.
Operating expenses decreased 17 percent and 21 percent for the
third quarter and first nine months of 1996, respectively,
compared with the same periods in 1995, reflecting the company's
continuous cost improvement efforts. This decrease is mainly the
result of technology enhancements, plant modernizations, plant
consolidations and reengineering efforts completed in 1995, and
represents a significant shift in the company's long-term cost
structure. Included in the third quarter 1996 decrease was the
reversal of a $2 million Oklahoma property tax accrual as the
result of a favorable court ruling.
Selling, general and administrative expenses decreased $6 million
and $12 million for the third quarter and first nine months of
1996, respectively, compared with the same periods in 1995.
These lower costs were mainly the result of reengineering efforts
and technology enhancements in 1995, which made staffing
reductions possible in 1996. In addition, the 1996 periods
benefited relative to the 1995 periods because third quarter 1995
included a charge of $3 million for potential severance costs,
while third quarter 1996 included a $2 million severance accrual
reversal due to the company's being able to place more personnel
with other Phillips business units than had previously been
anticipated. This decrease was partially offset in the third
quarter of 1996 by the cost of integrating the majority of the
company's accounting functions into its regional operations, and
higher employee benefit costs.
Interest expense increased in the third quarter and first nine
months of 1996, primarily resulting from the company's higher
outstanding loan balances in 1996, compared with 1995.
Excluding the effect of the change in depreciation method from
the unit-of-production method to straight-line, effective
January 1, 1996, depreciation expense for both the three- and
nine-month periods of 1996 increased, when compared with the same
periods in 1995, due to a December 1995 acquisition and the
completion of several major projects during 1995, including major
improvements to the company's Linam Ranch, Goldsmith and Eunice
plants.
10
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Operating activities increased cash $136 million in the first
nine months of 1996, primarily due to the increase in net income.
Cash from operating activities was also impacted by increases in
accounts receivable and trade payables, as a result of higher NGL
and residue gas prices. Accounts payable to affiliate decreased,
primarily as a result of severance payments made during the first
nine months of 1996.
Cash disbursed for capital expenditures and investments in the
first nine months of 1996 was $47 million, compared with
$116 million for the same period in 1995. Capital spending in
1996 was primarily directed toward asset maintenance and projects
that added new raw gas supplies, while the 1995 amount included
expenditures to modernize the company's assets, improve operating
efficiency and add new raw gas supplies. Property dispositions
in the first nine months of 1996 included the sale of the Lucien
plant and system located in Oklahoma. The first nine months of
1995 included the sale of a small gathering system in West Texas.
The company continues to consider strategic acquisitions and
expansion opportunities within its core operating areas. Future
capital investments will be determined by the company in
coordination with Phillips' capital spending budget. Phillips
annually allocates its overall capital spending budget to each of
its strategic business units, of which the company is one. The
company has budgeted $80 million for capital spending in 1996.
OUTLOOK
As a result of the change in accounting method for the
depreciation of natural gas plants and systems to the straight-
line method, effective January 1, 1996, it is now expected that
depreciation expense for 1996 will be approximately $25 million
lower than it would have been under the method previously used.
However, this effect is expected to be more than offset by
increased depreciation expense resulting from asset acquisitions
and capital additions.
Residue gas prices decreased $.34 per thousand cubic feet for the
month of September 1996, compared with the average price for 1996,
but remained $.26 per thousand cubic feet higher than September 1995
prices. A seasonal increase in residue gas prices is expected in
the fourth quarter of 1996. NGL sales prices during the third
quarter of 1996 were at their highest level in over five years.
NGL prices in the fourth quarter of 1996 are expected to remain
well above the prices experienced in 1995. Lower operating and
selling, general and administrative expenses are also expected
throughout 1996, compared with 1995, as a result of the company's
previous reengineering efforts and technology enhancements.
11
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
27 Financial Data Schedule
Reports on From 8-K
- -------------------
During the three months ended September 30, 1996, the company did
not file any reports on Form 8-K.
12
<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 GAS COMPANY
/s/ E. L. Batchelder
--------------------------------------
E. L. Batchelder
Senior Vice President, Treasurer,
Controller and Chief Financial Officer
(Chief Accounting and Duly
Authorized Officer)
November 7, 1996
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Phillips Gas Company as of September 30, 1996,
and the related consolidated statement of operations for the nine-month
period ended September 30, 1996, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 65,242
<SECURITIES> 0
<RECEIVABLES> 167,839
<ALLOWANCES> 905
<INVENTORY> 7,315
<CURRENT-ASSETS> 244,743
<PP&E> 1,913,339
<DEPRECIATION> 1,053,308
<TOTAL-ASSETS> 1,179,309
<CURRENT-LIABILITIES> 237,538
<BONDS> 340,000
0
345,000
<COMMON> 142,917
<OTHER-SE> 89,624
<TOTAL-LIABILITY-AND-EQUITY> 1,179,309
<SALES> 1,128,419
<TOTAL-REVENUES> 1,184,436
<CGS> 1,026,194<F1>
<TOTAL-COSTS> 1,026,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,200
<INCOME-PRETAX> 128,933
<INCOME-TAX> 50,381
<INCOME-CONTINUING> 78,552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,552
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Gas purchases + Operating expenses + Depreciation.
<F2>Income per share of common stock has been omitted because all common
stock is owned by Phillips Petroleum Company.
</FN>
</TABLE>
