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 June 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
------------------------------------------------------
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 July 31, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Operations Phillips Gas Company
Thousands of Dollars
--------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------
1996 1995 1996 1995
--------------------------------------
Revenues
Natural gas liquids $169,006 133,116 325,699 265,347
Residue gas 212,256 137,449 405,284 265,193
Other 21,648 11,585 36,777 20,610
- ---------------------------------------------------------------------
Total Revenues 402,910 282,150 767,760 551,150
- ---------------------------------------------------------------------
Costs and Expenses
Gas purchases 288,114 194,175 545,462 379,644
Operating expenses 44,237 55,076 83,885 108,080
Selling, general and
administrative expenses 4,150 6,891 8,320 14,776
Depreciation 17,919 17,875 37,172 35,329
Interest expense 5,975 4,674 12,222 8,600
- ---------------------------------------------------------------------
Total Costs and Expenses 360,395 278,691 687,061 546,429
- ---------------------------------------------------------------------
Income before income taxes 42,515 3,459 80,699 4,721
Provision for income taxes 16,850 1,116 31,409 1,620
- ---------------------------------------------------------------------
Net Income 25,665 2,343 49,290 3,101
Preferred stock dividend
requirements 8,038 8,038 16,077 16,077
- ---------------------------------------------------------------------
Net Income (Loss) Applicable
to Common Stock $ 17,627 (5,695) 33,213 (12,976)
=====================================================================
See Notes to Financial Statements.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Gas Company
Thousands of Dollars
----------------------
June 30 December 31
1996 1995
----------------------
Assets
Cash and cash equivalents $ 93,853 53,800
Accounts receivable
Affiliate 58,586 55,376
Trade (less allowances:
1996--$905; 1995--$962) 106,842 74,350
Inventories 6,026 6,791
Deferred income taxes 3,785 12,181
Prepaid expenses and other current assets 1,854 2,467
- -----------------------------------------------------------------
Total Current Assets 270,946 204,965
Investments and long-term receivables 15,377 15,943
Properties, plants and equipment (net) 864,054 875,023
Deferred income taxes 40,956 57,332
Deferred gathering fees 24,048 19,905
- -----------------------------------------------------------------
Total $1,215,381 1,173,168
=================================================================
Liabilities
Accounts payable
Affiliate $ 33,841 50,458
Trade 179,153 157,618
Accrued income and other taxes 19,843 15,787
Other accruals 82 264
- -----------------------------------------------------------------
Total Current Liabilities 232,919 224,127
Long-term debt due to affiliate 400,000 400,000
Other liabilities and deferred credits 7,201 6,452
Deferred gain on sale of assets 18,943 19,484
- -----------------------------------------------------------------
Total Liabilities 659,063 650,063
- -----------------------------------------------------------------
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 68,401 35,188
- -----------------------------------------------------------------
Total Stockholders' Equity 556,318 523,105
- -----------------------------------------------------------------
Total $1,215,381 1,173,168
=================================================================
See Notes to Financial Statements.
2
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Cash Flows Phillips Gas Company
Thousands of Dollars
--------------------
Six Months Ended
June 30
--------------------
1996 1995
--------------------
Cash Flows from Operating Activities
Net income $ 49,290 3,101
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 37,172 35,329
Deferred taxes 16,376 2,535
Deferred gathering fees (4,143) (4,599)
Gain on sale of assets (3,858) (540)
Decrease (increase) in accounts
receivable (35,702) 14,590
Decrease (increase) in inventories 765 (337)
Decrease (increase) in prepaid expenses
and other current assets 9,009 (2,385)
Increase (decrease) in accounts payable 4,918 (34,842)
Increase (decrease) in taxes and other
accruals 3,874 (8,935)
Other 850 (3,783)
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 78,551 134
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments (29,018) (72,424)
Proceeds from asset dispositions 6,597 6,716
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (22,421) (65,708)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Preferred stock dividend (16,077) (16,077)
Issuance of debt - 65,000
- -----------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities (16,077) 48,923
- -----------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents 40,053 (16,651)
Cash and cash equivalents at beginning
of period 53,800 33,196
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 93,853 16,545
=================================================================
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 six-month periods ending June 30, 1996, benefited
$4,600,000 and $8,000,000, respectively. The estimated
cumulative effect of the change was not material.
Note 3--Inventories
Inventories consisted of the following:
Thousands of Dollars
------------------------
June 30 December 31
1996 1995
------------------------
Natural gas $ - 923
Helium 1,782 1,782
Materials, supplies and other 4,244 4,086
- -----------------------------------------------------------------
$6,026 6,791
=================================================================
4
<PAGE>
Note 4--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Thousands of Dollars
------------------------
June 30 December 31
1996 1995
------------------------
Properties, plants and equipment
(at cost) $1,902,311 1,888,512
Less accumulated depreciation and
amortization 1,038,257 1,013,489
- -----------------------------------------------------------------
$ 864,054 875,023
=================================================================
Note 5--Income Taxes
The company's effective tax rates for the three- and six-month
periods ended June 30, 1996, were 40 and 39 percent,
respectively, compared with 32 and 34 percent for each of the
same periods a year ago. The higher 1996 tax rates for the
second quarter and six-month period resulted from an increase in
state taxes due to higher income subject to state taxes.
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 Six Months Ended
June 30 June 30
------------------ -----------------
1996 1995 1996 1995
------------------ -----------------
Operating revenues $175,137 164,272 344,147 317,881
Gas purchases 30,863 25,819 62,049 50,783
Operating expenses 26,671 34,102 53,379 68,137
Selling, general and
administrative expenses 3,611 6,370 7,684 12,758
Interest income 322 83 592 190
Interest expense 6,029 4,615 12,220 8,479
- -----------------------------------------------------------------
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 from 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 second quarters of 1996 and 1995, net fees paid to
GGG for gathering and compression were $10,490,000 and
$13,180,000, respectively; $8,443,000 and $10,912,000,
respectively, were expensed. For the six-month period ended
June 30, 1996 and 1995, net fees paid were $21,085,000 and
$26,606,000, respectively, and $16,942,000 and $22,007,000,
respectively, were expensed.
Note 8--Keep Well Agreement
Under the terms of a Keep Well Agreement between the company and
Phillips, the company has 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 will 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 9--Cash Flow Information
Cash payments for interest and income taxes for the six-month
periods ended June 30 were as follows:
Thousands of Dollars
---------------------
1996 1995
---------------------
Cash payments
Interest $12,428 8,632
Income taxes 1,452 3,402
- -----------------------------------------------------------------
7
<PAGE>
- -----------------------------------------------------------------
Management's Discussion and Analysis Phillips Gas Company
RESULTS OF OPERATIONS
The company had net income of $26 million and $49 million for the
second quarter and first six months of 1996, respectively,
compared with $2 million and $3 million for the same periods in
1995.
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
Reported net income $26 2 49 3
Less non-operating items (1) (3) (5) (5)
- -----------------------------------------------------------------
Net operating income $27 5 54 8
=================================================================
Net operating income increased $22 million and $46 million for
the second quarter and first six 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, and a gain on the sale of a plant and
gathering system in the second quarter of 1996.
8
<PAGE>
Three Months Ended Six Months Ended
June 30 June 30
Sales, Purchases and --------------------- --------------------
Throughput Statistics 1996 1995 Change 1996 1995 Change
--------------------- --------------------
Natural gas liquids
sales (thousands
of barrels daily) 150 143 5% 145 144 1%
Residue gas sales
(millions of cubic
feet daily) 1,080 1,020 6 1,080 1,016 6
Average sales prices
Natural gas liquids
(per barrel) $12.39 10.23 21 12.34 10.15 22
Residue gas (per
thousand cubic
feet) $ 2.16 1.48 46 2.06 1.44 43
Natural gas purchases
(millions of cubic
feet daily) 1,584 1,443 10 1,537 1,436 7
Raw gas throughput
(millions of cubic
feet daily) 1,938 1,624 19 1,915 1,603 19
- ------------------------------------------------------------------
Revenues
NGL prices have increased, primarily as a result of low NGL
inventories and increased demand for NGL feedstock for production
of petrochemicals, compared to the same periods in 1995. NGL
sales volumes have improved in the second 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 benefited from a cold winter in North
America, compared with a very mild winter in 1995, impacting both
demand for gas and storage levels in the first quarter of 1996.
The effect of lower storage levels and higher summer cooling
demand has resulted in the continuation of strong residue gas
prices through the second quarter of 1996. 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 gathering assets.
Other revenue increased $10 million and $16 million for the
second quarter and first six months of 1996, respectively,
compared with the same periods in 1995, due to an increase in
gathering and by-product revenues, and 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 $94 million and $166 million for the
second quarter and first six months of 1996, respectively,
compared with the same periods in 1995. As a percentage of
operating revenue, gas costs were 72 percent for the second
quarter and 71 percent for the first six months of 1996,
respectively, compared with 69 percent for the same periods in
1995.
Operating expenses decreased 20 percent and 22 percent for the
second quarter and first six 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.
Selling, general and administrative expenses decreased 40 percent
and 44 percent for the second quarter and first six months of
1996, respectively, compared with the same periods in 1995.
Reengineering efforts and technology enhancements resulted in
staffing reductions, which was the main reason for the decrease.
Interest expense increased in the second quarter and first six
months of 1996, primarily due to the company's higher
outstanding loan balances in 1996, compared with 1995.
When compared with the same periods in 1995, depreciation expense
for both the three- and six-month periods of 1996 increased 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. These
increases were partly offset by a change in depreciation method
from the unit-of-production method to straight-line, effective
January 1, 1996.
10
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The company's cash and cash equivalents balance at June 30, 1996,
increased $40 million from the December 31, 1995, balance.
Operating activities increased cash $79 million in the first six
months 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, both
due to higher NGL and residue gas prices. Affiliate payables
decreased primarily due to severance and employee performance
improvement payments made in the first six months of 1996.
Cash disbursed for capital expenditures and investments in the
first six months of 1996, was $29 million, compared with
$72 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 six months of 1996 included the sale of the Lucien
plant and system located in Oklahoma. The first six months of
1995 included the sale of a small gathering system in West Texas.
Under the terms of a Keep Well Agreement between the company and
Phillips, the company has 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 will 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.
Late in July, the company signed a purchase agreement with Amoco
Production Company to purchase approximately 630 miles of
gathering pipeline and Amoco's interest in the North Cowden
plant, which are located in the Permian Basin of West Texas. The
gathering facilities currently gather approximately 40 million
cubic feet of gas per day from about 420 meter stations. The
company plans to integrate the gathering facilities into its
existing gathering facilities and shut down the plant. The
acquisition is subject to Hart-Scott-Rodino review. Pending
government approval, closing is expected in fourth quarter 1996.
Payment will be made upon the latter of closing or January 3,
1997.
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
11
<PAGE>
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 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 offset by increased
depreciation expense resulting from asset acquisitions and
capital additions.
NGL and residue gas sales prices continue to remain strong into
the third quarter. While some softening is likely, continued low
storage levels for both gas and NGL, combined with strength in
the NGL markets, should provide higher prices in 1996 than were
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 continuous
review of its organizational structure and work processes, the
company plans to integrate the majority of the accounting and
information technology functions into its regional operations by
the end of 1996.
12
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual stockholders' meeting on May 14,
1996. A brief description of each proposal and the voting
results follows:
Election of two directors by holders of the company's Series A
9.32% Cumulative Preferred Stock.
For Against & Withheld
--- ------------------
John L. Adams 12,548,156 102,903
Otway B. Denny, Jr. 12,543,007 108,052
Election of five directors by Phillips Petroleum Company, the
sole holder of the company's Common Stock.
For Against & Withheld
--- ------------------
E. L. Batchelder 1,000 0
George B. Beitzel 1,000 0
C. L. Bowerman 1,000 0
J. J. Mulva 1,000 0
M. J. Panatier 1,000 0
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
27 Financial Data Schedule
Reports on From 8-K
- -------------------
During the three months ended June 30, 1996, the company has not
filed any reports on Form 8-K.
13
<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)
August 8, 1996
14
<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 June 30, 1996, and the
related consolidated statement of operations for the six-month period ended
June 30, 1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 93,853
<SECURITIES> 0
<RECEIVABLES> 166,333
<ALLOWANCES> 905
<INVENTORY> 6,026
<CURRENT-ASSETS> 270,946
<PP&E> 1,902,311
<DEPRECIATION> 1,038,257
<TOTAL-ASSETS> 1,215,381
<CURRENT-LIABILITIES> 232,919
<BONDS> 400,000
0
345,000
<COMMON> 142,917
<OTHER-SE> 68,401
<TOTAL-LIABILITY-AND-EQUITY> 1,215,381
<SALES> 730,983
<TOTAL-REVENUES> 767,760
<CGS> 666,519<F1>
<TOTAL-COSTS> 666,519
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,222
<INCOME-PRETAX> 80,699
<INCOME-TAX> 31,409
<INCOME-CONTINUING> 49,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,290
<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>
