SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -------------------
Commission file number 1-11594
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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 April 30, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
- - -----------------------------------------------------------------
Consolidated Statement of Operations Phillips Gas Company
Thousands of Dollars
--------------------
Three Months Ended
March 31
--------------------
1996 1995
--------------------
Revenues
Natural gas liquids $156,693 132,231
Residue gas 193,028 127,744
Other 15,129 9,025
- - -----------------------------------------------------------------
Total Revenues 364,850 269,000
- - -----------------------------------------------------------------
Costs and Expenses
Gas purchases 257,348 185,469
Operating expenses 39,648 53,004
Selling, general and administrative
expenses 4,170 7,885
Depreciation 19,253 17,454
Interest expense 6,247 3,926
- - -----------------------------------------------------------------
Total Costs and Expenses 326,666 267,738
- - -----------------------------------------------------------------
Income before income taxes 38,184 1,262
Provision for income taxes 14,559 504
- - -----------------------------------------------------------------
Net Income 23,625 758
Preferred stock dividend requirements 8,039 8,039
- - -----------------------------------------------------------------
Net Income (Loss) Applicable
to Common Stock $ 15,586 (7,281)
=================================================================
See Notes to Financial Statements.
1
<PAGE>
- - -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Gas Company
Thousands of Dollars
------------------------
March 31 December 31
1996 1995
------------------------
Assets
Cash and cash equivalents $ 53,441 53,800
Accounts receivable
Affiliate 63,262 55,376
Trade (less allowances:
1996--$905; 1995--$962) 97,044 74,350
Inventories 6,387 6,791
Deferred income taxes 3,294 12,181
Prepaid expenses and other current
assets 2,566 2,467
- - -----------------------------------------------------------------
Total Current Assets 225,994 204,965
Investments and long-term receivables 15,592 15,943
Properties, plants and equipment (net) 868,292 875,023
Deferred income taxes 51,743 57,332
Deferred gathering fees 22,001 19,905
- - -----------------------------------------------------------------
Total $1,183,622 1,173,168
=================================================================
Liabilities
Accounts payable
Affiliate $ 39,643 50,458
Trade 167,136 157,618
Accrued income and other taxes 11,766 15,787
Other accruals 122 264
- - -----------------------------------------------------------------
Total Current Liabilities 218,667 224,127
Long-term debt due to affiliate 400,000 400,000
Other liabilities and deferred credits 7,051 6,452
Deferred gain on sale of assets 19,213 19,484
- - -----------------------------------------------------------------
Total Liabilities 644,931 650,063
- - -----------------------------------------------------------------
Stockholders' Equity
Preferred stock--100 million shares
authorized at $.01 par value; issued
and outstanding--13,800,000 shares,
liquidation preference:
1996--$349,019; 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 50,774 35,188
- - -----------------------------------------------------------------
Total Stockholders' Equity 538,691 523,105
- - -----------------------------------------------------------------
Total $1,183,622 1,173,168
=================================================================
See Notes to Financial Statements.
2
<PAGE>
- - -----------------------------------------------------------------
Consolidated Statement of Cash Flows Phillips Gas Company
Thousands of Dollars
--------------------
Three Months Ended
March 31
--------------------
1996 1995
--------------------
Cash Flows from Operating Activities
Net income $ 23,625 758
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation 19,253 17,454
Deferred taxes 5,589 824
Deferred gathering fees (2,096) (2,331)
Gain on sale of assets (282) (254)
Decrease (increase) in accounts
receivable (30,580) 16,883
Decrease in inventories 404 1,545
Decrease (increase) in prepaid expenses
and other current assets 8,788 (2,067)
Decrease in accounts payable (1,297) (47,304)
Decrease in taxes and other accruals (4,163) (9,071)
Other 707 (2,701)
- - -----------------------------------------------------------------
Net Cash Provided by (Used for) Operating
Activities 19,948 (26,264)
- - -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments (12,812) (29,655)
Proceeds from asset dispositions 544 5,411
- - -----------------------------------------------------------------
Net Cash Used for Investing Activities (12,268) (24,244)
- - -----------------------------------------------------------------
Cash Flows from Financing Activities
Preferred stock dividend (8,039) (8,039)
Issuance of debt - 30,000
- - -----------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities (8,039) 21,961
- - -----------------------------------------------------------------
Decrease in Cash and Cash Equivalents (359) (28,547)
Cash and cash equivalents at beginning
of period 53,800 33,196
- - -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 53,441 4,649
=================================================================
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, first quarter 1996
net income benefited $3,400,000. The estimated cumulative effect
of the change was not material.
Note 3--Inventories
Inventories consisted of the following:
Thousands of Dollars
------------------------
March 31 December 31
1996 1995
------------------------
Natural gas $ - 923
Helium 1,782 1,782
Materials, supplies and other 4,605 4,086
- - -----------------------------------------------------------------
$6,387 6,791
=================================================================
4
<PAGE>
Note 4--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Thousands of Dollars
------------------------
March 31 December 31
1996 1995
------------------------
Properties, plants and equipment
(at cost) $1,896,601 1,888,512
Less accumulated depreciation
and amortization 1,028,309 1,013,489
- - -----------------------------------------------------------------
$ 868,292 875,023
=================================================================
Note 5--Income Taxes
The company's effective tax rate for the three-month period ended
March 31, 1996, was 38 percent, compared with 40 percent for the
same period a year ago. The lower tax rate in 1996 was due to
the decrease in the proportion of permanent differences, compared
with pre-tax income.
Note 6--Contingencies
The company is a party to a number of legal proceedings pending
in various courts or agencies for which no provision has been
made. Costs related to contingencies are provided when a loss is
probable and the amount can be reasonably estimated. These
accruals are not discounted for delays in future payments and are
not reduced for potential insurance recoveries. Based on
currently available information, the company believes that it is
remote that future costs related to known contingent liability
exposures will exceed current accruals by an amount that would
have a material adverse impact on the company's financial
statements.
5
<PAGE>
Note 7--Related Party Transactions
Significant transactions with affiliated parties were:
Thousands of Dollars
--------------------
Three Months Ended
March 31
--------------------
1996 1995
--------------------
Operating revenues (a) $169,010 153,609
Gas purchases (b) 31,186 24,964
Operating expenses (c)(e)(h) 26,708 34,035
Selling, general and administrative
expenses (c)(d)(e) 4,073 6,388
Interest income (f) 270 107
Interest expense (g) 6,191 3,864
- - -----------------------------------------------------------------
(a) The company sells a portion of its residue gas and other by-
products to Phillips Petroleum Company (Phillips) at
contractual prices that approximate market prices. The
company sells substantially all of its natural gas liquids
(NGL) to Phillips at prices based upon quoted market prices
for fractionated NGL less transportation, fractionation and
quality-adjustment fees.
(b) The company purchases raw gas from Phillips at contractual
prices that approximate market prices. The loss of Phillips
as a raw gas supplier would have a material adverse effect
on the company's dedicated raw gas supplies and its
operating results.
(c) Phillips provides the company with various field services
(costs included in operating expenses) and other general
administrative services (costs included in selling, general
and administrative expenses) including insurance, personnel
administration, office space, communications, data
processing, engineering, automotive and other field
equipment, and other miscellaneous services. Charges for
these services and benefits are based on usage and actual
costs or other allocation methods the company considers
reasonable.
(d) Phillips charges the company a portion of its corporate
indirect overhead costs including executive, legal,
treasury, planning, tax, auditing and other corporate
services, under administrative services agreements.
6
<PAGE>
(e) All PGC operational and staff personnel requirements are met
by Phillips' employees, most of whom are associated with the
GPM Gas Services Company division of Phillips. All services
provided by Phillips, including (c) and (d) above, are
priced to reimburse Phillips for its actual costs.
(f) The company earns interest from participation in Phillips'
centralized cash management system.
(g) The company incurs interest expense on borrowings from
Phillips.
(h) The company pays gathering fees to GPM Gas Gathering L.L.C.
(GGG), a limited liability company in which the company owns
a 50-percent interest, and expenses certain components of
those fees on a straight-line basis through the remaining
period of a long-term contract. In the first quarters of
1996 and 1995, net fees paid to GGG for gathering and
compression were $10,595,000 and $13,426,000, respectively,
and $8,499,000 and $11,095,000 were expensed.
The company provides Phillips with minor administrative services.
Costs allocated to Phillips for these services have been netted
against the above direct charges from Phillips and were $63,000
and $65,000 for the first quarters of 1996 and 1995,
respectively.
The company periodically buys from, or sells to, Phillips various
assets used in the operations of the business. These net (sales)
acquisitions were recorded at the assets' historical net book
values, which generally approximated fair market value, and
totaled $(58,000) and $166,000 for the first quarter of 1996 and
1995, respectively. In addition, the company purchases plastic
pipe from Phillips, which is used in the construction of
gathering systems. Purchases during the first quarters of 1996
and 1995 were $459,000 and $1,468,000, respectively.
Note 8--Cash Flow Information
Cash payments for interest and income taxes for the three-month
periods ended March 31 were as follows:
Thousands of Dollars
--------------------
1996 1995
--------------------
Cash Payments
Interest $6,305 3,861
Income taxes - 2,910
- - -----------------------------------------------------------------
7
<PAGE>
- - -----------------------------------------------------------------
Management's Discussion and Analysis Phillips Gas Company
RESULTS OF OPERATIONS
The company had net income of $24 million in the first quarter of
1996, compared with $1 million for the same period in 1995.
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1996 1995
-------------------
Reported net income $24 1
Less non-operating items (4) (2)
- - -----------------------------------------------------------------
Net operating income $28 3
=================================================================
Net operating income for the first quarter of 1996 was
$28 million, compared with $3 million for the corresponding
quarter in 1995. The $25 million improvement was 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 sales volumes and
gathering fees. Lower operating and selling, general and
administrative expenses, partly offset by increased depreciation,
also contributed to the increase in net operating income. Non-
operating items consisted of interest revenue and expense in both
periods.
Three Months Ended
March 31
------------------
Sales, Purchases and Throughput Statistics 1996 1995
------------------
Natural gas liquids sales
(thousands of barrels daily) 140 146
Residue gas sales
(millions of cubic feet daily) 1,080 1,012
Average sales prices
Natural gas liquids (per barrel) $12.29 10.07
Residue (per thousand cubic feet) $ 1.96 1.40
Natural gas purchases
(millions of cubic feet daily) 1,490 1,428
Raw gas throughput
(millions of cubic feet daily) 1,892 1,581
- - -----------------------------------------------------------------
8
<PAGE>
Revenues
NGL revenues increased 18 percent to $157 million in the first
quarter of 1996, compared with the same period in 1995. Average
NGL sales prices increased 22 percent to $12.29 per barrel,
compared with $10.07 per barrel in 1995. This increase was
partly offset by a 4 percent decrease in NGL sales volumes,
mainly due to start-up delays on new turbines at two of the
company's plants; an operational disruption at a plant operated
by one of the company's partners; and the shutdown of one of the
company's older plants, where a portion of the gas is being
processed at other plants while the remainder of the gas is
temporarily being treated and sold until alternate processing
arrangements can be made. These decreases in NGL sales volumes
were partly offset by increased NGL sales volumes from an
acquisition which was completed late in 1995.
Residue gas sales were $193 million in the first quarter of 1996,
compared with $128 million in 1995. This increase in residue gas
sales was due to a 40 percent increase in residue gas sales
prices and a 7 percent increase in residue gas sales volumes. The
first quarter 1996 benefited from a cold winter in North America,
compared with a very mild winter in 1995, impacting both demand
for gas and storage levels. The increase in residue gas sales
volumes was primarily the result of the company's expansion in
the Austin Chalk area of Central Texas and the December 1995
acquisition of two Enron Corp. subsidiaries which held Anadarko
Basin gathering assets.
Other revenue increased 68 percent in the first quarter of 1996,
compared with the same period in 1995, due to an increase in
gathering revenue, and an increase in by-product revenues, which
were related to higher crude oil prices.
Expenses
Gas purchase costs were $257 million for the first three months
of 1996, compared with $185 million for the same period of 1995.
As a percentage of operating revenue, gas costs were 71 percent
and 69 percent for the first quarters of 1996 and 1995,
respectively. The higher gas purchase costs reflect the
interaction of the company's gas purchase contracts with the
higher first quarter 1996 residue gas and NGL sales prices, along
with higher gas purchase volumes.
First quarter 1996 operating expenses decreased 25 percent from
the first quarter 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.
9
<PAGE>
Selling, general and administrative expenses for the first
quarter of 1996 decreased $4 million, or 47 percent from the
first quarter of 1995. Staffing reductions resulting from
reengineering efforts and technology enhancements were the main
reasons for the decrease.
Interest expense increased in the first quarter of 1996 primarily
due to the company's higher outstanding loan balances in the
first quarter 1996, compared with 1995.
Depreciation expense increased due to the December 1995
acquisition of two Enron Corp. subsidiaries and the completion of
several major projects during 1995, including major improvements
to the company's Linam Ranch, Goldsmith and Eunice plants. These
increases were partly offset by a change in the company's
depreciation method to straight-line depreciation effective
January 1, 1996.
CAPITAL RESOURCES AND LIQUIDITY
The company's cash and cash equivalents balance at March 31,
1996, was $53 million, approximately the same as the December 31,
1995, balance. Operating activities increased cash $20 million
in the first quarter of 1996, primarily due to the increase in
net income. Operating activities were affected by increased
accounts receivable, partly offset by an increase in trade
payables. Affiliate payables decreased primarily due to severance
and employee performance improvement payments made in the first
quarter of 1996.
Cash disbursed for capital expenditures and investments in the
three months ended March 31, 1996, was $13 million, compared with
$30 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 quarter of 1995 included the sale of a small
gathering system in West Texas.
The company continues to consider strategic acquisition 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.
10
<PAGE>
OUTLOOK
As a result of the company's changing its method of accounting
for the depreciation of its natural gas plants and systems to the
straight-line method effective January 1, 1996, it is expected
that depreciation expense for 1996 will be approximately
$20 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.
Both NGL and residue gas sales prices continue to remain strong
into the second quarter. While some softening is likely, low gas
storage levels and strength in the NGL markets should continue to
provide higher prices in 1996 than were experienced in 1995. The
company expects increased NGL sales volumes during the remainder
of 1996 as improvements at the company's facilities are fully
realized. Lower operating and selling, general and
administrative expenses are also expected to be realized
throughout 1996, compared with 1995.
11
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- - --------
18 Letter from Ernst & Young LLP Regarding Change in
Depreciation Accounting Method.
27 Financial Data Schedule.
Reports on Form 8-K
- - -------------------
During the three months ended March 31, 1996, the company filed
the following report on Form 8-K:
1. Dated December 31, 1995
Item 2. Acquisition or Disposition of Assets
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)
May 10, 1996
13
<PAGE>
Exhibit 18
May 10, 1996
Phillips Petroleum Company
Phillips Building
Bartlesville, Oklahoma 74004
Phillips Gas Company
First Interstate Tower, Suite 800
1300 Post Oak Boulevard
Houston, Texas 77056
Notes 2 of Notes to Financial Statements of Phillips Petroleum
Company and Phillips Gas Company included in their Forms 10-Q for
the three month period ended March 31, 1996, describe a change in
the method of accounting for the depreciation of natural gas
plants and systems of Phillips Gas Company, a subsidiary of
Phillips Petroleum Company, from the unit-of-production method to
the straight-line method. You have advised us that you believe
that the change is to a preferable method in your circumstances
because the change better reflects how the assets are expected to
be used over time, provides a better matching of revenues and
expenses, and is consistent with prevalent industry practice.
There are no authoritative criteria for determining a preferable
depreciation method based on the particular circumstances;
however, we conclude that the change in the method of accounting
for the depreciation of natural gas plants and systems is to an
acceptable alternative method which, based on your business
judgment to make this change for the reasons cited above, is
preferable in your circumstances. We have not conducted an audit
in accordance with generally accepted auditing standards of any
financial statements of Phillips Petroleum Company or Phillips
Gas Company as of any date or for any period subsequent to
December 31, 1995, and therefore we do not express any opinion on
any financial statements of Phillips Petroleum Company or
Phillips Gas Company subsequent to that date.
Very truly yours,
/s/ Ernst & Young LLP
Tulsa, Oklahoma
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Phillips Gas Company as of March 31, 1996, and
the related consolidated statement of operations for the three-month period
ended March 31, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 53,441
<SECURITIES> 0
<RECEIVABLES> 64,167
<ALLOWANCES> 905
<INVENTORY> 6,387
<CURRENT-ASSETS> 225,994
<PP&E> 1,896,601
<DEPRECIATION> 1,028,309
<TOTAL-ASSETS> 1,183,622
<CURRENT-LIABILITIES> 218,667
<BONDS> 400,000
0
345,000
<COMMON> 142,917
<OTHER-SE> 50,774
<TOTAL-LIABILITY-AND-EQUITY> 1,183,622
<SALES> 349,721
<TOTAL-REVENUES> 364,850
<CGS> 316,249<F1>
<TOTAL-COSTS> 320,419<F2>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,247
<INCOME-PRETAX> 38,184
<INCOME-TAX> 14,559
<INCOME-CONTINUING> 23,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,625
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Gas purchases + Operating expenses + Depreciation.
<F2>CGS + Selling, general and administrative expenses.
<F3>Income per share of common stock has been omitted because all common
stock is owned by Phillips Petroleum Company.
</FN>
</TABLE>
