FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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)
Registrant's telephone number, including area code: 713-297-6066
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Series A 9.32% Cumulative Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The registrant had 1,000 shares of Common Stock, $.01 Par Value, outstanding
at February 28, 1997, all of which was held by its parent, Phillips Petroleum
Company, and 13,800,000 shares of Series A 9.32% Cumulative Preferred Stock,
$.01 par value. The aggregate market value of the Cumulative Preferred Stock
held by non-affiliates of the registrant was $360,367,597 as of February 28,
1997. The registrant, solely for the purpose of this required presentation,
has deemed its Board of Directors to be affiliates, and deducted from its
outstanding shares in determining the aggregate market value, their beneficial
stockholdings of 6,025 shares.
Documents incorporated by reference:
Proxy Statement for the Annual Meeting of Stockholders
on May 13, 1997 (Part III)
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TABLE OF CONTENTS
PART I
Item Page
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1. and 2. Business and Properties.......................... 1
General........................................ 1
Overview of the Company's Business............. 1
Gathering Systems.............................. 3
Gas Processing................................. 4
Gas Supplies and Related Contracts............. 4
Marketing...................................... 6
Competition.................................... 6
Environmental Matters.......................... 8
Employees...................................... 8
3. Legal Proceedings................................ 9
4. Submission of Matters to a Vote of
Security Holders............................... 9
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Executive Officers of the Registrant............. 10
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters.................... 11
6. Selected Financial Data.......................... 12
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 13
8. Financial Statements and Supplementary Data...... 23
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 44
PART III
10. Directors and Executive Officers of the
Registrant..................................... 45
11. Executive Compensation........................... 45
12. Security Ownership of Certain Beneficial
Owners and Management.......................... 45
13. Certain Relationships and Related Transactions... 45
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K........................ 48
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PART I
Unless otherwise indicated, reference to "PGC" or the "company"
refers to Phillips Gas Company and its consolidated subsidiaries.
Also, unless the context requires otherwise, reference to
"Phillips" means Phillips Petroleum Company and its consolidated
subsidiaries, including the company. Items 1 and 2, Business and
Properties, contain forward-looking statements including, without
limitation, statements relating to the company's plans,
strategies, objectives, expectations, intentions, and adequate
resources, and are made pursuant to the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. The
words "intends," "possible," "probable," "believe," "expect,"
"plans," "scheduled," "anticipate," "estimate," "begin," 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 21.
Items 1 and 2. BUSINESS AND PROPERTIES
General
Phillips Gas Company, a Delaware corporation, is a subsidiary of
Phillips Petroleum Company. The company was organized in January
1992 for the purpose of owning and managing certain gas gathering
and processing assets of Phillips. The company is a leading
buyer and gatherer of raw natural gas, one of the domestic volume
leaders in the production of natural gas liquids (NGL), and a
major marketer of residue gas. PGC became a reporting company
under the Securities Exchange Act of 1934 for the first time in
December 1992, as a result of the completion of a public offering
of Series A 9.32% Cumulative Preferred Stock. The company's
principal operating subsidiary is GPM Gas Corporation (GPM).
The company's headquarters are located at First Interstate Tower,
Suite 800, 1300 Post Oak Boulevard, Houston, Texas 77056, and its
telephone number is (713) 297-6066.
Overview of the Company's Business
The Company's Business. The company owns and operates natural
gas gathering systems and processing facilities concentrated in
four major gas-producing areas in the Southwest. The company
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owns 13 NGL extraction plants, and operates or has an interest in
three more. The plants are located in Texas (10), Oklahoma (3),
and New Mexico (3). In addition, the company operates gas
gathering systems with approximately 27,000 miles of gathering
pipelines, with some 19,400 active meter connections to producing
wells.
The company gathers gas at the wellhead in the areas of its
gathering systems, compresses the gas at field compressors, and
delivers the compressed gas for processing, which separates the
raw gas stream (a natural gas stream containing liquefiable
hydrocarbons) into NGL and residue gas. NGL include ethane,
propane, normal butane, isobutane and natural gasoline, which are
extracted from raw gas in liquid form under high-pressure, low-
temperature conditions. Although most of the company's
facilities have the flexibility to extract ethane as part of the
NGL stream or allow it to remain as part of the residue gas, the
company does not further process the NGL into the other separate
components described above.
The company's core gathering and processing regions are
concentrated in the Permian Basin area of western Texas and
southeastern New Mexico, the Austin Chalk area of south central
Texas, the Panhandle areas of Texas and Oklahoma, and central and
western Oklahoma. The company is among the largest processors
and gatherers of natural gas in its operating regions.
The company sells substantially all of its NGL to Phillips. The
company is able to interconnect to major gas transmission
pipelines in each of its regions in order to sell residue gas to
local distribution companies, electric utilities, various other
business and industrial end-users, and marketers. The company's
major residue gas markets are primarily located in Texas, Oklahoma
and the midwestern United States. To expand its gas marketing
options, the company actively pursues additional pipeline
connections at its plants and other main delivery points.
The majority of the company's gas throughput is purchased under
levelized percentage-of-proceeds contracts. These contracts have
the effect of reducing the volatility of the company's feedstock
margin, compared with some other contract forms. See "Gas
Supplies and Related Contracts."
Recent Developments. In 1996, the company continued its strategy
of growth through the purchase of assets in its core operating
regions. The company completed the purchase of gathering systems
from ANR Pipeline Company, a Detroit-based subsidiary of The
Coastal Corporation, in late 1996. The acquired gathering assets
are primarily located in northwestern Oklahoma and include
approximately 1,570 miles of natural gas gathering pipeline and
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12 compressor units used to gather approximately 165 million
cubic feet of natural gas per day through about 1,000 meter
stations. To obtain Federal Trade Commission clearance, the
company agreed to sell about 170 miles of gathering assets which
gather approximately 10 million cubic feet per day of raw gas in
the area of the assets purchased in the transaction. The assets
to be sold include both assets purchased from ANR and assets
already owned and operated by the company.
In January 1997, the company purchased from Amoco Production
Company approximately 630 miles of gathering pipeline and Amoco's
interest in the North Cowden plant, which is located in the
Permian Basin of West Texas. The pipeline systems gather
approximately 40 million cubic feet of gas per day from about
420 meter stations. The company has integrated the gathering
facilities into its existing operations and shut down the plant.
As part of the company's asset rationalization program and its
continuous efforts to reduce costs and improve operating
efficiencies, during 1996 the company sold a small plant and
gathering system in Oklahoma, and idled a plant in New Mexico.
Gathering Systems
The company operates gas gathering systems with approximately
27,000 miles of gathering pipe, with some 19,400 active meter
connections to producing wells. At year-end 1996, electronic
flow measurement with radio telemetry had been installed on all
meter connections to producing wells, excluding recent
acquisitions.
Most of the company's gathering systems operate at comparatively
low pressure, which is a significant factor to gas producers.
New oil and gas wells begin to produce at varying amounts of
natural pressure. This natural pressure declines over time as
oil and gas are extracted, and most crude oil wells ultimately
require pumping to extract the crude oil and associated raw gas.
If the pressure at which a well is producing (whether natural or
pump-assisted) is greater than the pipeline pressure of the
gathering system to which it is connected, gas will flow at an
unencumbered rate from the well into the gathering system. As
wellhead pressures drop closer to the operating pressure of the
gathering system, the well will begin to produce at a
progressively more restricted flow. As production declines, the
well will often be disconnected from the higher pressure system
and reconnected to a gathering system operating at a lower
pressure.
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Gas Processing
The major operations involved at a gas processing plant include
inlet separation, liquids stabilization, amine treating,
dehydration, sulfur recovery and cryogenic refrigeration. The
design of each gas plant varies somewhat, primarily depending on
the composition and volumes of the raw gas it receives.
During the initial separation process, water and heavy
hydrocarbons separate from the raw gas and collect at the bottom
of a separator vessel. The separated gas travels to an amine
contactor, while the hydrocarbon liquids from the separator
undergo a stabilization process that removes vapors from the
liquids. The vapors, together with the separated gas, travel to
the amine contactor. During the amine treatment, carbon dioxide
and hydrogen sulfide separate from the gas. The gas is then
dehydrated to remove any remaining water and refrigerated or
cooled through expansion to liquefy the ethane and heavier
components and produce residue gas. If a sulfur plant is
present, the hydrogen sulfide removed from the gas travels
through a sulfur recovery unit, which converts the hydrogen
sulfide into elemental sulfur and sulfur dioxide. If no such
plant is present, the hydrogen sulfide is incinerated, producing
sulfur dioxide.
In 1996, the company delivered approximately 1,454 million cubic
feet per day of residue gas, of which 1,076 million cubic feet
per day was sold by the company to local distribution companies,
electric utilities, various other business and industrial end-
users, and marketers. The company extracted 159,000 gross
barrels per day of NGL, of which 148,000 barrels per day were
sold, primarily to Phillips. Most of the remainder of the
residue gas and NGL production was taken by certain of the
company's raw gas suppliers who elected to retain their
production in lieu of cash payments.
Gas Supplies and Related Contracts
The company does not directly own any crude oil or raw gas
reserves. The company purchases most of its raw gas from
producers under long-term contracts. These producers range in
size from small independent owners and operators to large
integrated oil companies, such as the company's largest single
supplier, Phillips. Each producer generally dedicates to the
company the raw gas produced from designated oil and natural gas
leases for the term of the contract, which typically extends for
three to seven years, but not beyond the economic life of the
wells located within the leases.
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The majority of the company's gas purchase contracts are on a
percentage-of-proceeds basis under which it retains a specified
percentage of the net proceeds received from the sale of residue
gas and an index-based value for NGL. The company also purchases
gas from leases under percentage-of-index pricing terms where
both residue gas and NGL values are based on index prices for
each product. Index prices for NGL and residue gas are published
market-based reference prices. Under these so-called "levelized"
percentage-of-proceeds and percentage-of-index arrangements, a
single percentage applies to both allocable residue gas and NGL
content. This levelized arrangement is different from so-called
"casinghead" and other types of percentage arrangements, where
typically the processor's share of the residue gas value differs
from its share of the NGL value.
Gas processors have the option in the processing of raw gas to
include certain components of the gas, such as ethane, as part of
either the residue gas or NGL. Under a levelized contract, the
company therefore attempts to optimize the mix of residue gas and
NGL based on their relative market prices to attain the maximum
value for the aggregate processed mix of residue gas and NGL.
In addition to the company's gas purchase contracts, the company
also gathers raw gas for producers and shippers for redelivery to
customers at specified redelivery points in exchange for a gas
gathering fee. As part of the Federal Energy Regulatory
Commission (FERC) abandonment approval process, the company was
required to offer default gathering agreements, for a maximum
term of two years at previously regulated rates, on a large
portion of the volumes acquired from Enron Corp. in December
1995. In addition, the company expects to offer default-type
gathering agreements at previously regulated rates on the
majority of the volumes acquired from ANR Pipeline Company in
December 1996.
Phillips provided the company with approximately 9 percent of its
raw gas throughput during 1996 under long-term supply contracts,
making Phillips its largest single supplier. 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.
Based on historical volume data from wells dedicated to the
company under long-term contracts with producers, the raw gas
supplies under contract and available for processing were
estimated at 7.1 trillion cubic feet at year-end 1996, compared
with 6.7 trillion cubic feet at year-end 1995. The company does
not directly own any of these gas supplies.
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Marketing
NGL. Under an NGL sales contract, the company sells
- ---
substantially all of its net NGL production to Phillips as a
feedstock for various petrochemical and ethylene plants operated
by Phillips and for resale by Phillips to other NGL customers.
This contract provides that, based upon individual NGL
components, Phillips will pay to the company market price for the
components, less a charge designed to take into account the
estimated value of transportation and fractionation performed by
Phillips and quality-adjustment and other fees. The initial
contract term expires December 31, 2007, and can be terminated by
either party then, or at the end of any two-year period
thereafter, on not less than one year's prior notice.
In many cases, the tailgate of the company's gas processing plant
is connected directly to a Phillips facility through NGL
gathering and transmission lines owned by Phillips. Several of
the company's facilities also have access to third-party NGL
transmission pipelines and pipelines owned by the NGL customers
to which Phillips resells a portion of the company's NGL output.
Residue Gas. During 1996, the company's average sales of residue
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gas were 1,076 million cubic feet per day. These sales were made
to over 90 customers, with approximately 96 percent of the
residue volumes being sold to about 50 customers.
In 1996, Phillips was the company's third largest single customer
for residue gas, purchasing approximately 7 percent of the
company's residue gas output, primarily for its internal use as
fuel in its refining operations. The company believes that the
terms of the sales to Phillips were no less favorable to the
company than similar sales to unaffiliated third parties.
The company sold residue gas under index-based contracts with
approximately 64 percent of sales volumes having contract terms
of one year or longer in 1996, compared with 61 percent in 1995.
The company usually delivers title of the residue gas to its
customers at the tailgate of its processing plants. In some
cases, however, the company bears transportation costs or
undertakes responsibility for arranging for transportation
services when title to the residue gas passes after
transportation.
Competition
The company faces strong competition both in acquiring natural
gas supplies and in marketing residue gas. The company's
competitors in obtaining additional raw gas supplies, gathering
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and processing natural gas and marketing residue gas include
major integrated oil companies; major interstate pipeline
companies and their marketing affiliates; gas gatherers like the
company, which gather, process and market natural gas; and a
relatively large number of smaller gas gatherers of varying
financial resources and experience. Historically, the large
integrated oil companies have concentrated on operating gathering
and processing facilities primarily to service their own raw gas
production. Pipeline companies entered the processing business
as an extension of their transportation and sales functions.
Since they were required to deliver merchantable-quality residue
gas to customers, many established their own processing
facilities to remove contaminants from the gas they had purchased
directly from producers. Pipeline companies' supplies come from
gas purchased directly from producers at the wellhead and from
third parties at processing plants. As a result of regulatory
changes made by the FERC, most of these activities are now
conducted by unregulated affiliates of interstate pipeline
companies. Therefore, the company both competes with pipeline
companies and/or their affiliates for supplies of gas, and
supplies gas to the pipeline companies through residue gas
marketing activities.
Competition for gas supplies is concentrated in geographic
regions based upon the location of gathering systems and gas
processing plants. Although the company is among the largest
gatherers and processors in the geographic regions in which it
operates, most producers in these areas have alternate gathering
and processing facilities available to them. In addition,
producers have other alternatives, such as building their own
gathering facilities or selling their raw gas supplies without
processing. Thus, competition for gas supplies in these regions
is primarily based on the reputation, efficiency and reliability
of the gatherer/processor, the availability and cost of
transportation, the pricing arrangement offered by the
gatherer/processor and the ability of the gatherer/processor to
obtain a satisfactory price for the producers' residue gas and
extracted NGL. The company expects increased competition in
acquiring new supplies.
In addition to competition in gas gathering and processing, there
is vigorous competition in marketing residue gas. Competition
for customers is based primarily upon the price of the delivered
gas, the services offered by the seller, and the reliability of
the seller in making deliveries. For customers that have the
capability of using alternative fuels, such as oil and coal,
residue gas also competes on a price basis with these alternative
fuels and on the basis of local environmental considerations.
Also, to foster competition in the natural gas industry, certain
regulatory actions of the FERC and some states have allowed
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buying and selling to occur at more points along the distribution
and delivery system.
Since the company has dedicated substantially all of its NGL
output to Phillips under an NGL sales contract, the company does
not expect to experience competition in the marketing of NGL
until the contract expires.
Environmental Matters
The environmental information contained in Management's
Discussion and Analysis of Financial Condition and Results of
Operations on page 19 under the caption, "Environmental" is
incorporated herein by reference. It includes information on
expensed and capitalized environmental costs for 1996 and those
expected for 1997 and 1998.
Employees
Operational and staff personnel requirements are met by Phillips
employees, mainly associated with Phillips' GPM Gas Services
Company division, under the terms of several service agreements
where Phillips is reimbursed by the company for its costs of
providing these services. This enables the employees to
participate in Phillips' employee benefit plans. At December 31,
1996, the GPM Gas Services Company division employed
1,130 people, 16 percent less than the previous year.
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Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age* Position
- ---- --- --------
E. L. Batchelder 49 Senior Vice President,
Treasurer, Controller and
Chief Financial Officer;
Director
M. J. Panatier 48 President and Chief Executive
Officer; Director
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*On March 1, 1997
There is no family relationship between the officers named above.
Each has been an employee of Phillips for more than five years.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
None.
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Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the
company and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of
Operations, the consolidated financial statements and related
notes.
Millions of Dollars
---------------------------------------
1996 1995 1994 1993 1992
---------------------------------------
Total revenues $1,724 1,124 1,196 1,251 1,166
Income (loss) before
cumulative effect of
change in accounting
principle 128 (3) 25 68 50
Net income (loss) 128 (3) 25 68 45
Total assets 1,293 1,173 941 972 1,212
Long-term debt 310 400 220 285 400
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
March 7, 1997
Management's Discussion and Analysis is the company's analysis of
its financial performance and of significant trends that may
affect future performance. It should be read in conjunction with
the financial statements and notes, and accounting policies. It
contains forward-looking statements including, without
limitation, statements relating to the company's plans,
strategies, objectives, expectations, intentions, and adequate
resources, and are made pursuant to the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. The
words "intends," "possible," "probable," "believe," "expect,"
"plans," "scheduled," "anticipate," "estimate," "begin," 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 21.
Sales, Purchases and Throughput Statistics
1996 1995 1994
--------------------------
Natural gas liquids sales
(thousands of barrels daily) 148 144 151
Residue gas sales
(millions of cubic feet daily) 1,076 1,017 949
Average sales prices:
Natural gas liquids (per barrel) $14.49 10.07 9.77
Residue gas (per thousand cubic
feet) $ 2.20 1.49 1.79
Natural gas purchases
(millions of cubic feet daily) 1,538 1,441 1,370
Raw gas throughput
(millions of cubic feet daily) 1,913 1,620 1,505
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Results of Operations
1996 Compared With 1995
Natural gas liquids (NGL) revenues were $784 million in 1996, a
48 percent increase from 1995. NGL prices increased throughout
1996, with prices averaging $16.54 per barrel in the last six
months of 1996. The price increase was a result of low NGL
inventories, curtailed supplies and increased demand for NGL
feedstocks for production of petrochemicals. NGL sales volumes
improved in 1996, mainly due to the December 1995 acquisition of
Anadarko Basin gathering assets and to the conversion of Linam
Ranch plant in New Mexico to a cryogenic facility providing more
efficient NGL recovery rates.
Residue gas revenues were $865 million in 1996, a 57 percent
increase from 1995. Residue gas sales prices rebounded sharply
during 1996, with a high of $3.46 per thousand cubic feet for the
month of December. Low industry storage levels and high seasonal
demand contributed to a 48 percent increase in residue sales
prices. The increase in residue gas sales volumes was primarily
the result of the December 1995 acquisition of gathering assets.
Other revenues increased $33 million to $75 million in 1996,
mainly due to increased gathering and by-product revenues. Other
revenue 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.
Gas purchase costs were $1,233 million in 1996, compared with
$782 million in 1995. As a percentage of operating revenues, gas
purchase costs were 72 percent and 70 percent for 1996 and 1995,
respectively.
Operating expenses were $171 million in 1996, a decrease of
19 percent from 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 were $15 million in
1996, compared with $43 million in 1995, including a severance
reversal of $3 million in 1996, and a severance accrual of
$17 million in 1995. The severance reversal was due to Phillips'
ability to place more of the personnel providing services to the
company with other Phillips business units than had previously
been anticipated, thus reducing the company's responsibility for
severance costs under its service agreement with Phillips.
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Selling, general and administrative expenses, excluding severance
cost adjustments, decreased $8 million, mainly the result of
reengineering efforts and technology enhancements.
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 1996 increased,
compared with 1995, due to a large 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.
Interest expense increased $4 million in 1996, compared with
1995, due to a higher average outstanding loan balance in 1996,
partially offset by lower interest rates.
In summary, net income was $128 million in 1996, compared with a
$3 million net loss in 1995. The improvement was mainly the
result of improved margins due to higher NGL and residue gas
sales prices, and increased raw gas throughput volumes, which
increased residue gas and NGL sales volumes and gathering fees.
Net income also benefited from significantly lower operating and
selling, general and administrative expenses.
1995 Compared With 1994
Although the company increased its raw gas throughput, revenues
were adversely affected by lower residue gas sales prices and
lower NGL sales volumes. Revenues were $1,124 million in 1995,
compared with $1,196 million in 1994. The increase in raw gas
throughput was primarily the result of the company's expansion in
the Austin Chalk area of south central Texas, the December 1994
acquisition of the Linam Ranch plant and systems in New Mexico,
and a June 1995 system acquisition in New Mexico.
NGL revenues were $531 million in 1995, a $9 million decrease
from 1994. Average NGL sales prices increased slightly in 1995
with lower prices for ethane being more than offset by higher
prices for propane, butane and natural gasoline. NGL sales
volumes decreased 5 percent, mainly due to lower retention rates
at the Linam Ranch plant, a lean oil absorption plant that was
acquired in 1994 and converted to a cryogenic plant late in 1995.
Residue gas revenues decreased $67 million to $552 million in
1995, with a 7 percent increase in residue sales volumes more
than offset by a 17 percent decrease in residue gas sales prices.
Abundant gas supplies kept prices below 1994 levels until the
fourth quarter 1995 when increased seasonal demand pushed prices
to the then highest level since the second quarter of 1994.
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Other revenues were $42 million in 1995, compared with
$38 million in 1994. This increase was mainly due to an increase
in sales volumes and prices of by-products, and increased gas
gathering revenues, partially offset by lower equity earnings
from GPM Gas Gathering L.L.C. (GGG) and lower interest income.
Gas purchase costs decreased $37 million to $782 million in 1995.
As a percentage of operating revenues, gas purchase costs were
70 percent and 69 percent for 1995 and 1994, respectively.
Operating expenses were $212 million in 1995, compared with
$222 million in 1994. This decrease was due to lower gathering
fees paid to GGG and to the company's continued efforts to reduce
operating costs.
Selling, general and administrative expenses were $43 million in
1995, compared with $37 million in 1994, including severance
accruals of $17 million and $9 million, respectively. Selling,
general and administrative expenses, excluding severance
accruals, decreased $2 million.
The $3 million increase in depreciation expense from 1994 to 1995
was mainly the result of the company's Linam Ranch acquisition in
late 1994.
Interest expense increased $11 million in 1995, compared with
1994, due to higher interest rates and increased debt levels
resulting from the company's acquisitions and other capital
spending during late 1994 and throughout 1995.
In summary, net income decreased $28 million from 1994, resulting
in a $3 million loss in 1995. The decrease was primarily due to
lower residue gas sales prices, lower NGL sales volumes, and
increased interest and severance expense, partly offset by
increased residue gas sales volumes and lower operating expenses.
Capital Resources and Liquidity
Operating activities increased cash $223 million in 1996,
primarily due to the increase in net income. Cash from operating
activities was also impacted by increases in accounts receivable
and accounts payable, primarily as a result of higher NGL and
residue gas prices. Affiliate accounts payable decreased,
primarily as a result of severance payments made during 1996.
Cash and cash equivalents increased $25 million to $79 million in
1996.
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The company has two borrowing arrangements with Phillips--a
$400 million loan agreement that expires in 2001, and a
$200 million revolving credit facility which is available for the
duration of the Keep Well Agreement (see Note 12 in the Notes to
Financial Statements). Both the loan agreement and the revolving
credit facility bear interest at LIBOR plus one-half of 1 percent
per annum. At December 31, 1996 and 1995, no borrowings were
outstanding under the revolving credit facility.
Phillips has a centralized program for controlling, managing and
coordinating its risk management programs and the use of
derivative instruments, as well as those of its subsidiaries.
Through its services agreement with Phillips, the company takes
advantage of this centralized program for executing its own risk
management strategies. The company's derivatives contracts and
resulting gains or losses were immaterial to the financial
statements of the company.
Capital Expenditures and Investments
Capital spending for the company was $85 million in 1996,
compared with $276 million in 1995. In 1996, capital spending
was primarily directed towards asset maintenance, technology
upgrades and projects that added new raw gas supplies, including
the fourth-quarter 1996 acquisition of gathering systems from ANR
Pipeline Company (ANR). The gathering assets acquired are
primarily located in northwestern Oklahoma and include
approximately 1,570 miles of natural gas gathering pipeline which
gather approximately 165 million cubic feet per day of raw gas
volumes. To obtain Federal Trade Commission clearance, the
company agreed to sell, by April 30, 1997, about 170 miles of
gathering assets which gather approximately 10 million cubic feet
per day of raw gas. As part of the consideration given for the
ANR assets, the company issued an $18.5 million promissory note
due in December 1997.
In January 1997, the company purchased from Amoco Production
Company approximately 630 miles of gathering pipeline and Amoco's
interest in the North Cowden plant, which is located in the
Permian Basin of West Texas. The gathering facilities gather
approximately 40 million cubic feet of gas per day from about
420 meter stations. The company has integrated the gathering
facilities into its existing operations and shut down the plant.
In 1995, the company's capital expenditures and investments
increased 60 percent over 1994, with the completion of several
major projects begun in 1994, along with the completion of a
major acquisition late in 1995 when the company acquired the
stock of two Enron Corp. subsidiaries holding Anadarko Basin
17
<PAGE>
gathering assets. This acquisition added about 260 million cubic
feet per day of raw gas volume. Two smaller acquisitions were
also completed in 1995, one in the company's New Mexico region
and the second in its Oklahoma region. In addition to these
acquisitions, the company completed major upgrades at its Linam
Ranch plant, acquired in late 1994, and at its Eunice and
Goldsmith plants, converting the Linam Ranch facility to a
cryogenic process and replacing old inefficient compression with
modern turbines at each plant.
The company's capital expenditures and investments totaled
$173 million in 1994. Capital spending in 1994 included the
acquisition of Linam Ranch plant and gathering system in New
Mexico; the initiation of several projects to improve operating
efficiencies, including improvements to the Goldsmith and Eunice
plants, technology upgrades and asset consolidations; and general
plant and system maintenance.
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 $100 million for capital spending in 1997.
Most of the budgeted funds are scheduled to be used to increase
production volumes through acquisitions and new well connections,
as well as for investments in technology and operating equipment
to improve operating efficiency and provide value-added producer
services.
The company believes that cash generated from operating
activities, its borrowing arrangements with Phillips and rights
under the Keep Well Agreement will be sufficient to meet its
working capital needs and to fund capital expenditures, debt
service and dividends on the preferred stock.
The preferred stock becomes redeemable in whole, or in part, on
or after December 14, 1997. The company is currently reviewing
its options, including the probable redemption of these
securities if economically attractive at that time.
Contingencies
Legal Matters
At December 31, 1996, other liabilities and deferred credits
included accrued contingent liabilities relating to legal
proceedings pending before various courts or agencies. Costs
18
<PAGE>
related to contingencies are provided when a loss is probable and
the amount can be reasonably estimated. Based on currently
available information, the company believes that it is remote
that future costs related to known contingent liability exposures
will exceed current accruals by an amount that would have a
material adverse impact on the company's financial statements.
Environmental
The company's activities are subject to various federal, state
and local environmental laws and regulations. The company, as
well as other companies engaged in the gas gathering or
processing industries, is required to incur costs for preventive
and corrective actions at various facilities. Most of the
regulatory requirements applicable to the gas gathering and
processing industry relate to water and air pollution control and
solid waste management. Currently, exploration- and production-
type waste, which includes gas gathering and processing, is
exempt from classification as hazardous waste under the Resource
Conservation and Recovery Act (RCRA). Although the company
believes it is unlikely this exemption will be repealed in the
near future, repeal would increase costs for solid waste disposal
and soil remediation at company facilities.
Under Title V of the federal 1990 Clean Air Act amendments, all
major source facilities are required to obtain operating permits.
This program was implemented in 1995 in the company's New Mexico
region and has gone into effect in Oklahoma and Texas for gas
gathering and processing operations, with full implementation in
1997. Additional Title V requirements include compliance
assurance monitoring. These additional requirements are still
being finalized and are not expected to be implemented prior to
mid-1997.
At year-end 1996, the company had not been identified as a
Potentially Responsible Party (PRP) at any sites. The expensed
and capitalized environmental costs in 1996 were $6 million and
$7 million, respectively. Both expensed and capitalized
environmental costs are expected to be approximately $6 million
to $7 million in 1997 and 1998.
Other
Phillips Gas Company has net deferred tax assets primarily from
loss carryforwards and the alternative minimum tax credit. These
deferred tax assets were created when the tax bases in the
company's assets were increased as a result of the 1992 transfer
of substantially all of its assets to GPM Gas Corporation and the
19
<PAGE>
subsequent issuance of PGC preferred stock. The tax depreciation
taken on the increased bases has resulted in net operating loss
carryforwards and the alternative minimum tax credit for which
the deferred tax assets have been recorded. The company believes
it is more likely than not that it will fully realize the
deferred tax assets and, accordingly, a valuation allowance has
not been provided. Management expects the deferred tax assets
will be realized as reductions in future taxable operating income
or by utilizing available tax planning strategies. Uncertainties
that may affect the ultimate realization of these assets include
tax law changes and the future level of product prices, costs,
and tax rates. Therefore, the company periodically reviews its
ability to realize these assets and will establish a valuation
allowance if needed.
Outlook
NGL and residue gas sales prices improved significantly during
1996, compared with the past five years. The increase in prices
was particularly sharp in the fourth quarter, when NGL prices
were $19.08 per barrel and residue gas prices were $2.62 per
thousand cubic feet. While NGL and residue gas sales prices
remain extremely volatile, the company anticipates that prices
will decrease in 1997 from 1996 levels.
Raw gas throughput volumes increased 18 percent in 1996 over
1995, and increases are expected in 1997 due to the acquisitions
completed in late 1996 and in January 1997. The January 1997
acquisition is anticipated to add approximately 8,500 barrels per
day of NGL production volumes. Operating expenses decreased
19 percent in 1996 from 1995, and are expected to increase only
modestly in 1997, due to the recent acquisitions.
The company anticipates that gas purchase costs will continue to
fluctuate with residue gas and NGL prices, reflecting the impact
of the company's gas-purchase-contract mix, and that the upward
pressure on gas purchase costs will continue in 1997 due to
competition for new gas volumes in the company's core operating
areas.
Phillips and PGC continue to explore various economically
attractive business opportunities to maximize the value of PGC's
gas gathering, processing and marketing assets, including, but
not limited to, mergers, acquisitions, strategic alliances or
joint ventures.
20
<PAGE>
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Phillips Gas Company 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 in
any forward-looking statement made by, or on behalf of, the
company.
Where any such forward-looking statement includes a statement of
the assumptions or bases underlying such forward-looking
statement, the company cautions that, while it 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, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will
result, or be achieved or accomplished.
Taking into account the foregoing, 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 for the construction or modernization of gathering and
processing facilities, and the timing of production from
such facilities are subject to, in certain instances,
approval from the company's board of directors and the
amount allocated for the company in Phillips' capital budget
program; and in general, to the issuance by federal, state
and municipal governments, or agencies thereof, of building,
environmental and other permits; the availability of
specialized contractors and work force; prices of and demand
for products; the company's ability to control its costs;
availability of raw materials; and transportation mainly in
the form of pipelines, and to a lesser extent, railcars or
trucks; and changes in laws, particularly tax and
environmental.
21
<PAGE>
o Estimates of raw natural gas supplies, additional volumes
and costs from acquisitions, 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 generally accepted accounting principles
and other applicable requirements; however, new or revised
information or changes in scope or economics could cause
results to vary, perhaps materially.
22
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHILLIPS GAS COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Management.................................... 24
Report of Independent Auditors.......................... 25
Consolidated Statement of Operations for the
years ended December 31, 1996, 1995 and 1994.......... 26
Consolidated Balance Sheet at December 31, 1996
and 1995.............................................. 27
Consolidated Statement of Cash Flows for the years
ended December 31, 1996, 1995 and 1994................ 28
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1996,
1995 and 1994......................................... 29
Accounting Policies..................................... 30
Notes to Financial Statements........................... 32
Supplementary Information
Selected Quarterly Financial Data................... 43
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation Accounts and Reserves............ 47
All other schedules are omitted because they are either not
required, not significant, not applicable or the information is
shown in another schedule, the financial statements or in the
notes to financial statements.
23
<PAGE>
- -----------------------------------------------------------------
Report of Management
Management prepared, and is responsible for, the consolidated
financial statements and the other information appearing in this
annual report. The consolidated financial statements present
fairly the company's financial position, results of operations
and cash flows in conformity with generally accepted accounting
principles. In preparing its consolidated financial statements,
the company includes amounts that are based on estimates and
judgments which Management believes are reasonable under the
circumstances.
The company maintains an internal control structure designed to
provide reasonable assurance that the company's assets are
protected from unauthorized use and that all transactions are
executed in accordance with established authorizations and
recorded properly. The internal control structure is supported
by written policies and guidelines and is complemented by
Phillips' staff of internal auditors. Management believes that
the system of internal controls in place at December 31, 1996,
provides reasonable assurance that the books and records reflect
the transactions of the company and there has been compliance
with its policies and procedures.
The company's financial statements have been audited by Ernst &
Young LLP, independent auditors. Management has made available
to Ernst & Young LLP all the company's financial records and
related data, as well as the minutes of stockholders' and
directors' meetings.
/s/ M. J. Panatier /s/ E. L. Batchelder
M. J. Panatier E. L. Batchelder
President and Senior Vice President,
Chief Executive Officer Treasurer, Controller and
Chief Financial Officer
March 7, 1997
24
<PAGE>
- -----------------------------------------------------------------
Report of Independent Auditors
The Board of Directors and Stockholders
Phillips Gas Company
We have audited the accompanying consolidated balance sheets of
Phillips Gas Company as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. Our audits also included
the financial statement schedule listed in the Index in Item 8.
These financial statements and schedule are the responsibility of
the company's Management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by Management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Phillips Gas Company at December 31, 1996
and 1995, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note 2 to the Financial Statements, effective
January 1, 1996, the company changed its method of accounting for
the depreciation of its natural gas plants and systems.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 7, 1997
25
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Operations Phillips Gas Company
Years Ended December 31 Thousands of Dollars
----------------------------------
1996 1995 1994
----------------------------------
Revenues
Natural gas liquids $ 783,514 530,562 539,653
Residue gas 864,889 551,514 618,616
Other 75,236 42,065 37,693
- -----------------------------------------------------------------
Total Revenues 1,723,639 1,124,141 1,195,962
- -----------------------------------------------------------------
Costs and Expenses
Gas purchases 1,232,578 781,947 818,506
Operating expenses 171,211 212,372 221,831
Selling, general and
administrative expenses 15,288 42,601 37,161
Depreciation 73,342 73,159 70,010
Interest expense 23,356 19,587 9,052
- -----------------------------------------------------------------
Total Costs and Expenses 1,515,775 1,129,666 1,156,560
- -----------------------------------------------------------------
Income (loss) before income
taxes 207,864 (5,525) 39,402
Provision for income taxes 79,665 (2,830) 14,573
- -----------------------------------------------------------------
Net Income (Loss) 128,199 (2,695) 24,829
Preferred stock dividend
requirements 32,154 32,154 32,154
- -----------------------------------------------------------------
Net Income (Loss) Applicable
to Common Stock $ 96,045 (34,849) (7,325)
=================================================================
See Accounting Policies and Notes to Financial Statements.
26
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Gas Company
At December 31 Thousands of Dollars
----------------------
1996 1995
----------------------
Assets
Cash and cash equivalents $ 79,031 53,800
Accounts receivable
Affiliate 96,653 55,376
Trade (less allowances: 1996--$905;
1995--$962) 147,598 74,350
Inventories 6,418 6,791
Deferred income taxes 4,007 12,181
Prepaid expenses and other current assets 2,660 2,467
- -----------------------------------------------------------------
Total Current Assets 336,367 204,965
Investments and long-term receivables 13,629 15,943
Properties, plants and equipment (net) 902,493 875,023
Deferred income taxes 12,090 57,332
Deferred gathering fees 28,497 19,905
- -----------------------------------------------------------------
Total $1,293,076 1,173,168
=================================================================
Liabilities
Accounts payable
Affiliate $ 43,310 50,458
Trade 249,864 157,618
Note payable 18,500 -
Accrued income and other taxes 27,316 15,787
Other accruals 162 264
- -----------------------------------------------------------------
Total Current Liabilities 339,152 224,127
Long-term debt due to affiliate 310,000 400,000
Other liabilities and deferred credits 6,372 6,452
Deferred gain on sale of assets 18,402 19,484
- -----------------------------------------------------------------
Total Liabilities 673,926 650,063
- -----------------------------------------------------------------
Stockholders' Equity
Preferred stock--100 million shares
authorized at $.01 par value;
issued and outstanding--13,800,000
shares, liquidation preference--$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 131,233 35,188
- -----------------------------------------------------------------
Total Stockholders' Equity 619,150 523,105
- -----------------------------------------------------------------
Total $1,293,076 1,173,168
=================================================================
See Accounting Policies and Notes to Financial Statements.
27
<PAGE>
- -------------------------------------------------------------------
Consolidated Statement of Cash Flows Phillips Gas Company
Years Ended December 31 Thousands of Dollars
-----------------------------
1996 1995 1994
-----------------------------
Cash Flows from Operating Activities
Net income (loss) $ 128,199 (2,695) 24,829
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities
Non-working capital adjustments
Depreciation 73,342 73,159 70,010
Deferred taxes 45,242 3,892 9,830
Deferred gathering fees (8,592) (9,126) (10,779)
Gain on sale of assets (4,498) (1,024) (976)
Other (723) (1,823) (6,371)
Working capital adjustments
Decrease (increase) in accounts
receivable (114,525) (6,088) 4,127
Decrease in inventories 373 2,464 1,669
Decrease (increase) in prepaid
expenses and other current
assets, including deferred
taxes 8,142 (6,890) (1,793)
Increase in accounts payable 85,098 15,798 36,651
Increase (decrease) in taxes
and other accruals 11,427 (1,863) 6,369
- -------------------------------------------------------------------
Net Cash Provided by Operating
Activities 223,485 65,804 133,566
- -------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments (85,188) (276,234) (172,772)
Proceeds from asset dispositions 9,088 8,188 1,846
- -------------------------------------------------------------------
Net Cash Used for Investing
Activities (76,100) (268,046) (170,926)
- -------------------------------------------------------------------
Cash Flows from Financing Activities
Preferred stock dividend (32,154) (32,154) (32,154)
Issuance of debt - 180,000 115,000
Repayment of debt (90,000) - (180,000)
Contributions from parent - 75,000 -
- -------------------------------------------------------------------
Net Cash Provided by (Used for)
Financing Activities (122,154) 222,846 (97,154)
- -------------------------------------------------------------------
Increase (Decrease) in Cash
and Cash Equivalents 25,231 20,604 (134,514)
Cash and cash equivalents at
beginning of year 53,800 33,196 167,710
- -------------------------------------------------------------------
Cash and Cash Equivalents at
End of Year $ 79,031 53,800 33,196
===================================================================
See Accounting Policies and Notes to Financial Statements.
28
<PAGE>
- ------------------------------------------------------------------------------
Consolidated Statement of Changes Phillips Gas Company
in Stockholders' Equity
Thousands of Dollars
-----------------------------------------
Shares Common Stock
------------------ --------------------
Preferred Common Preferred Par Capital in Retained
Stock Stock Stock Value Excess of Par Earnings
------------------ -----------------------------------------
December 31,
1993 13,800,000 1,000 $345,000 - 67,917 77,362
Net income 24,829
Cash dividends
paid on pre-
ferred stock (32,154)
- ------------------------------------------------------------------------------
December 31,
1994 13,800,000 1,000 345,000 - 67,917 70,037
Net loss (2,695)
Contribution
from parent 75,000
Cash dividends
paid on pre-
ferred stock (32,154)
- ------------------------------------------------------------------------------
December 31,
1995 13,800,000 1,000 345,000 - 142,917 35,188
Net income 128,199
Cash dividends
paid on pre-
ferred stock (32,154)
- ------------------------------------------------------------------------------
December 31,
1996 13,800,000 1,000 $345,000 - 142,917 131,233
==============================================================================
See Accounting Policies and Notes to Financial Statements.
29
<PAGE>
- -----------------------------------------------------------------
Accounting Policies Phillips Gas Company
o Consolidation Principles and Basis of Presentation--Phillips
Gas Company (PGC or the company) is a subsidiary of Phillips
Petroleum Company (Phillips). Phillips owns 100 percent of
the company's outstanding common stock. Majority-owned,
controlled subsidiaries are consolidated. Investments in
affiliates in which the company owns 20 percent to 50 percent
of voting control are accounted for using the equity method.
o Reclassification--Certain amounts in the 1995 and 1994
financial statements have been reclassified to conform with
the 1996 presentation.
o Use of Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles
requires Management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosures of contingent assets and
liabilities. Actual results could differ from the estimates
and assumptions used.
o Cash and Cash Equivalents--Cash and cash equivalents are held
by Phillips as part of its centralized cash management system.
Interest is paid monthly based on the average daily balance of
funds invested at a rate equal to the weighted-average rate
earned by Phillips.
Cash equivalents are highly liquid short-term investments that
are readily convertible to known amounts of cash and generally
have original maturities within three months from their date
of purchase.
o Inventories--Natural gas inventory is valued at cost, which is
lower than market, mainly on the first-in, first-out (FIFO)
basis. Helium inventory is valued at cost, which is lower
than market, mainly on the last-in, first-out (LIFO) basis.
Materials and supplies are valued at, or below, average cost.
o Derivative Contracts--The company uses commodity swap and
option contracts. Option contracts are recorded at market
value through monthly adjustments for unrealized gains and
losses; however, swaps are not marked to market. Gains and
losses are recognized during the same period in which the
gains and losses from the underlying exposures being hedged
are recognized.
30
<PAGE>
o Gas Exchanges and Imbalances--Quantities of gas over-delivered
or under-delivered related to exchange or imbalance agreements
are recorded monthly as receivables or payables using the
index price or the average price of gas at the plant or
system. Generally, these balances are settled with deliveries
of gas.
o Depreciation--Depreciation of plants and systems is determined
using the straight-line method over an estimated life of
20 years for most assets. Other properties and equipment are
also depreciated using the straight-line method over the
estimated useful lives of the assets.
o Property Dispositions--When complete units of depreciable
property are retired or sold, the asset cost and related
accumulated depreciation are eliminated, with any gain or loss
reflected in income. When less than complete units of
depreciable property are disposed of or retired, the
difference between asset cost and salvage value is charged or
credited to accumulated depreciation.
o Environmental Costs--Environmental expenditures are expensed
or capitalized as appropriate, depending upon their future
economic benefit. Expenditures that relate to an existing
condition caused by past operations, and that do not have
future economic benefit, are expensed.
o Income Taxes--Deferred income taxes are computed using the
liability method and are provided on all temporary differences
between the financial reporting basis and the tax basis of the
company's assets and liabilities. Allowable tax credits are
applied currently as reductions of the provision for income
taxes.
o Income Per Share of Common Stock--Income per share of common
stock has been omitted from the consolidated statement of
operations because all common stock is owned by Phillips.
31
<PAGE>
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Gas Company
Note 1--The Company's Business
The company owns and operates natural gas gathering systems and
processing facilities concentrated in four major gas-producing
areas in the Southwest. Of these facilities, the company owns
13 NGL extraction plants, and operates or has an interest in
three more. The plants are located in Texas (10), Oklahoma (3),
and New Mexico (3). In addition, the company operates gas
gathering systems. The company's core gathering and processing
regions are concentrated in the Permian Basin area of western
Texas and southeastern New Mexico, the Austin Chalk area of south
central Texas, the Panhandle areas of Texas and Oklahoma, and
central and western Oklahoma.
The company sells substantially all of its NGL to Phillips. The
company is able to interconnect to major gas transmission
pipelines in each of its regions in order to sell residue gas to
local distribution companies, electric utilities, various other
business and industrial end-users and marketers. The company's
major residue gas markets are primarily located in Texas,
Oklahoma and the midwestern United States.
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
1996 benefited $17,600,000. The estimated cumulative effect of
the change was not material.
32
<PAGE>
Note 3--Inventories
Inventories at December 31 consisted of the following:
Thousands of Dollars
--------------------
1996 1995
--------------------
Natural gas $1,514 923
Helium 1,153 1,782
Materials, supplies and other 3,751 4,086
- -----------------------------------------------------------------
$6,418 6,791
=================================================================
Included in the amounts above were inventories valued on a LIFO
basis totaling $1,153,000 and $1,782,000 at December 31, 1996 and
1995, respectively. These LIFO inventories would have been
approximately $1,489,000 and $2,072,000 higher, respectively, had
they been valued using the FIFO method.
Note 4--Investments and Long-Term Receivables
Components of investments and long-term receivables at
December 31 were as follows:
Thousands of Dollars
--------------------
1996 1995
--------------------
Investment in affiliated company $ 3,953 5,315
Long-term receivables 9,676 10,628
- -----------------------------------------------------------------
$13,629 15,943
=================================================================
During 1993, the company formed GPM Gas Gathering L.L.C. (GGG), a
limited liability company in which the company invested
approximately $4 million in exchange for a 50 percent-equity
interest. The company sold a portion of its gas gathering assets
in the West Texas region of the Permian Basin to GGG for
$138 million. GGG is providing gas gathering services to the
company under a long-term contract. Because of the company's
continuing involvement in GGG, a $22 million gain from the sale
of the assets was deferred and is being recognized over the
economic life of the gathering assets. In both 1996 and 1995,
$1,082,000 of this deferred gain was recognized. Distributions
received from GGG during 1996 and 1995 were $1,391,000 and
$1,442,000, respectively.
In July 1996, the company signed a purchase agreement with Amoco
Production Company to acquire certain gas gathering assets and
Amoco's interest in a gas plant, which are located in the Permian
Basin of West Texas. The purchase was completed in January 1997.
33
<PAGE>
Long-term receivables includes a $4 million earnest payment made
in the third quarter 1996, related to this acquisition. At
December 31, 1995, long-term receivables included a $5 million
earnest payment related to an acquisition that was completed in
1996.
Note 5--Properties, Plants and Equipment
Properties, plants and equipment (net) at December 31 included
the following:
Thousands of Dollars
----------------------
1996 1995
----------------------
Properties, plants and equipment
(at cost) $1,972,524 1,888,512
Less accumulated depreciation
and amortization 1,070,031 1,013,489
- -----------------------------------------------------------------
$ 902,493 875,023
=================================================================
Note 6--Debt
Long-term debt due to affiliate at December 31 consisted of the
following borrowing from Phillips under a $400 million loan
agreement.
Thousands of Dollars
--------------------
1996 1995
--------------------
Note due 2001 $310,000 400,000
- -----------------------------------------------------------------
The note bears interest at LIBOR plus 1/2 percent per annum
(6.03 percent at December 31, 1996). Any amount repaid may be
reborrowed as long as the agreement is in effect. The carrying
amount of this floating-rate debt approximates fair value.
The company also has a $200 million revolving credit facility
with Phillips which is available for the duration of the Keep
Well Agreement (see Note 12). This facility also bears interest
at LIBOR plus 1/2 percent per annum. There is no commitment fee
on the available, but unused, portion of the facility. At
December 31, 1996 and 1995, no borrowings were outstanding under
this facility.
In December 1996, the company issued a promissory note payable of
$18,500,000 due December 1997, as final payment on the assets
purchased from ANR Pipeline Company.
34
<PAGE>
Note 7--Financial Instruments
Concentrations of Credit Risk
The company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash
equivalents, accounts receivable and over-the-counter derivative
contracts. Derivative contracts are immaterial to the financial
statements of the company.
The company's cash and cash equivalents are held by Phillips as
part of its centralized cash management system. Cash equivalents
are in high-quality securities placed with major international
banks and financial institutions. Phillips' investment policy
limits the company's exposure to concentrations of credit risk
with respect to its cash equivalent investments.
The company's affiliate receivables result primarily from its
sales of natural gas liquids (NGL) and residue gas to Phillips.
The company's trade receivables result primarily from domestic
sales of residue gas to local distribution companies, electric
utilities, various other business and industrial end-users, and
marketers. The company routinely assesses the financial strength
of its unaffiliated residue gas customers. The company considers
its concentrations of credit risk, other than those with
Phillips, to be limited.
Fair Values of Financial Instruments
The following methods and assumptions were used by the company in
estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amount reported in the
balance sheet approximates fair value.
Short-term note payable: The carrying amount of the non-
interest-bearing promissory note payable was not discounted for
imputed interest, due to immateriality and the short-term nature
of the obligation. The fair value of the $18,500,000 note
payable was approximately $17,400,000 at December 31, 1996.
Long-term debt: The carrying amount of the company's floating-
rate debt approximates fair value.
35
<PAGE>
Note 8--Contingent Liabilities
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 payment 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.
Note 9--Related Party Transactions
Significant transactions with affiliated parties were:
Thousands of Dollars
----------------------------
1996 1995 1994
----------------------------
Operating revenues (a) $803,796 640,826 595,588
Gas purchases (b) 137,614 102,530 119,360
Operating expenses (c)(e)(h) 109,536 134,880 149,060
Selling, general and
administrative expenses (c)(d)(e) 12,003 39,821 34,124
Interest income (f) 1,899 588 2,064
Interest expense (g) 23,297 19,459 9,302
- -----------------------------------------------------------------
(a) The company sells a portion of its residue gas and other by-
products to Phillips at contractual prices that approximate
market prices. The company sells substantially all of its 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. During 1996, Phillips
provided the company with approximately 9 percent of its raw gas
throughput, under long-term supply contracts, making Phillips its
largest single supplier. 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.
36
<PAGE>
(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 an
administrative services agreement.
(e) All 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. Selling, general and
administrative expenses included a severance reversal of
$3 million in 1996, and charges of $17 million and $9 million for
severance benefits in connection with work force reductions in
1995 and 1994, respectively.
(f) The company earns interest from participation in Phillips'
centralized cash management system.
(g) The company incurs interest expense on borrowings from
Phillips.
(h) Beginning January 1, 1994, the company began paying GGG a
fee for gas gathering services under a long-term contract. The
gas gathering fee structure in the long-term contract contains a
component that is paid to GGG in an accelerated manner. Because
GGG is providing the same gas gathering services to the company
over the contract period, recognition of expenses related to this
component of the gathering fee is deferred and recognized on a
straight-line basis through the remaining period of the long-term
contract. In 1996, 1995 and 1994, the total gathering fees were
$42,285,000, $52,703,000 and $59,957,000, respectively, of which
$33,693,000, $43,577,000 and $49,178,000, respectively, were
expensed.
The company provides Phillips with other minor administrative
services. Costs allocated to Phillips for these services have
been netted against the above direct charges from Phillips and
were $277,200, $259,700 and $490,000 in 1996, 1995 and 1994,
respectively.
37
<PAGE>
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 $(98,000), $697,000 and $379,000 in 1996, 1995 and 1994,
respectively. Prior to such acquisition or sale, the company
paid or received a fee based on usage of such assets (included in
operating expenses above). In addition, the company purchases
plastic pipe from Phillips, which is used in the construction of
gathering systems. Purchases in 1996, 1995 and 1994 were
$2,938,000, $5,378,000 and $6,038,000, respectively.
Note 10--Employee Benefit Plans
Substantially all employees of Phillips' GPM Gas Services Company
division participate in Phillips' benefit plans, including
pension plans, defined contribution plans, stock option plans and
health and life insurance plans. Costs are allocated to the
company based principally on base payroll costs of participating
employees.
Note 11--Income Taxes
Taxes charged to income (loss) were:
Thousands of Dollars
-----------------------------
1996 1995 1994
-----------------------------
Federal
Current $26,041 (374) 7,357
Deferred 43,531 (665) 6,807
State
Current 208 492 445
Deferred 9,885 (2,283) (36)
- -----------------------------------------------------------------
$79,665 (2,830) 14,573
=================================================================
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Major components of the company's
deferred taxes at December 31 were:
38
<PAGE>
Thousands of Dollars
--------------------
1996 1995
--------------------
Deferred Tax Assets
Net operating loss carryforwards $ 46,096 84,403
Alternative minimum tax credit 42,531 16,490
Deferred gain on sale of assets 7,521 7,944
Other accruals 2,717 5,736
Other (net) 1,193 -
- -----------------------------------------------------------------
Total deferred tax assets 100,058 114,573
- -----------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 72,375 35,892
Prepaid gas gathering fees 11,586 6,967
Other (net) - 2,201
- -----------------------------------------------------------------
Total deferred tax liabilities 83,961 45,060
- -----------------------------------------------------------------
Net deferred tax assets $ 16,097 69,513
=================================================================
Phillips Gas Company has had net deferred tax assets since 1992,
when the tax bases in the company's assets were increased as a
result of the transfer of substantially all of its assets to
GPM Gas Corporation and the subsequent issuance of preferred
stock. The net operating loss carryforwards and the alternative
minimum tax credit result primarily from tax depreciation on the
increased bases in the company's assets.
The company believes it is more likely than not that it will
fully realize its deferred tax assets, and, accordingly, a
valuation allowance has not been provided. Management expects
that the deferred tax assets will be realized as reductions in
future taxable operating income or by utilizing available tax
planning strategies. Uncertainties that may affect the
realization of these assets include tax law changes and the
future level of product prices, costs and tax rates. Therefore,
the company periodically reviews its ability to realize these
assets and will establish a valuation allowance if needed.
At December 31, 1996, the company had net operating loss
carryforwards of $92 million for U.S. income tax purposes, and
$269 million for state income tax purposes. The U.S. income tax
carryforwards begin expiring in 2009, and the state income tax
carryforwards begin expiring in 1998. The alternative minimum
tax credit can be carried forward indefinitely to reduce the
company's regular tax liability.
39
<PAGE>
The reconciliation of income tax at the federal statutory rate
with the provision for income taxes follows:
Percent of
Thousands of Dollars Pretax Income
----------------------- -------------------
1996 1995 1994 1996 1995 1994
----------------------- -------------------
Federal statutory
income tax $72,752 (1,933) 13,790 35.0% 35.0 35.0
State income tax 6,561 (1,164) 266 3.2 21.1 0.7
Other 352 267 517 0.1 (4.9) 1.3
- -----------------------------------------------------------------
$79,665 (2,830) 14,573 38.3% 51.2 37.0
=================================================================
The mix of individual subsidiary company profit and loss within
PGC for 1995, coupled with differing state tax rates, caused the
effective tax rate to vary substantially from 1996 and 1994.
Note 12--Preferred Stock and Keep Well Agreement
The company has outstanding 13,800,000 shares of Series A 9.32%
Cumulative Preferred Stock. Each Series A preferred share has a
liquidation value of $25 plus accrued and unpaid dividends. Each
share is redeemable, at the option of the company, on or after
December 14, 1997, at a redemption price of $25 per share, plus
accrued and unpaid dividends, if any. Dividends are cumulative
from the date of issuance and payable at the annual rate of
9.32 percent of the liquidation value. Dividend payments
commenced February 15, 1993, and are payable quarterly
thereafter. Holders of Series A Preferred Stock have voting
rights enabling them to elect not less than 25 percent of the
directors of the company, to vote on any amendments to a Keep
Well Agreement between Phillips and the company, and to vote with
holders of common stock on all other matters as to which
stockholders generally vote. Also, in certain circumstances
involving failure to declare or pay dividends, holders of
Series A shares can vote together with other holders of voting
stock having similar voting rights to elect two additional
directors to serve for as long as any such circumstances
continue.
The company has a Keep Well Agreement with Phillips that provides
for Phillips to maintain the company's consolidated tangible net
worth in an amount not less than the sum of $50 million and the
aggregate liquidation preferences of all outstanding shares of
Series A Preferred Stock and all outstanding shares of any other
preferred stock of the company ranking on a parity with the
Series A Preferred Stock upon liquidation. Accordingly, if the
company should determine that its consolidated tangible net worth
40
<PAGE>
is less than this sum, then Phillips will make, or cause one of
its subsidiaries to make, an equity infusion into the company,
either by purchase of an equity security, junior in all respects
to the Series A Preferred Stock, or by contribution to the
capital surplus of the company, in an amount necessary to
increase the company's consolidated tangible net worth to an
amount equal to this sum.
Under the Keep Well Agreement, neither Phillips nor any of its
subsidiaries can sell, pledge or otherwise dispose of, nor allow
the company to issue, any shares of the company's common stock if
the effect thereof is to reduce Phillips' common stock ownership
percentage of the company below 80 percent, or otherwise to cause
Phillips to no longer be able to elect a majority of the
company's directors. Phillips also committed to make available
to the company a liquidity facility in an amount sufficient to
enable the company to meet its payment obligations, if necessary,
including dividends on the Series A Preferred Stock.
In addition, 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 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.
As long as the preferred stock is outstanding, neither Phillips
nor the company may terminate the Keep Well Agreement for any
reason prior to January 1, 2003. After December 31, 2002, either
Phillips or the company may terminate the Keep Well Agreement
upon 30 business days' prior written notice, but only if the
Series A Preferred Stock receives a certain minimum credit
rating. The Keep Well Agreement can be modified or amended only
upon a vote of two-thirds of the voting power of the outstanding
shares of Series A Preferred Stock and all other shares of
preferred stock of the company, if any, ranking on a parity with
the Series A Preferred Stock upon liquidation, voting together as
a class.
41
<PAGE>
Note 13--Cash Flow Information
Thousands of Dollars
----------------------------
1996 1995 1994
----------------------------
Cash Payments
Interest $23,514 19,563 9,631
- -----------------------------------------------------------------
Income taxes, including payments
to Phillips $19,073 3,531 2,259
- -----------------------------------------------------------------
Non-Cash Investing Activities
In December 1996, the company issued a non-interest-bearing
promissory note payable of $18,500,000, due December 1997, as
final payment on the assets purchased from ANR Pipeline Company.
Note 14--Other Financial Information
Thousands of Dollars
------------------------------
1996 1995 1994
------------------------------
Maintenance and repairs $29,810 50,584 50,508
- -----------------------------------------------------------------
Taxes other than income and
payroll taxes $ 8,259 10,380 9,941
- -----------------------------------------------------------------
42
<PAGE>
- -----------------------------------------------------------------
Selected Quarterly Financial Data
Thousands of Dollars
----------------------------------------
Income (Loss)
Total Before Net Income
Revenues Income Taxes (Loss)
----------------------------------------
1996
First $364,850 38,184 23,625
Second 402,910 42,515 25,665
Third 416,676 48,234 29,262
Fourth 539,203 78,931 49,647
- -----------------------------------------------------------------
1995
First $269,000 1,262 758
Second 282,150 3,459 2,343
Third 267,606 (3,365) (1,740)
Fourth 305,385 (6,881) (4,056)
- -----------------------------------------------------------------
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. As a result of the change, net income benefited
$3,400,000, $4,600,000, $4,600,000 and $5,000,000 in the first,
second, third and fourth quarters of 1996, respectively.
During the third and fourth quarters of 1996, the company
reversed after-tax severance accruals of $1,430,000 and $322,000,
respectively, due to Phillips' ability to place more of the
personnel performing services for the company with other Phillips
business units than had previously been anticipated. After-tax
severance accruals were made during the same periods in 1995 of
$1,640,000 and $9,351,000, respectively, as a result of the
company's continuing plans to improve operating efficiency and
reduce costs.
43
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
44
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information presented under the headings "Nominees for Election
as Directors," "Directors Elected by Common Stockholder" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the
company's definitive proxy statement for the Annual Meeting of
Stockholders on May 13, 1997, is incorporated herein by
reference.* Information regarding the executive officers appears
in Part I of this report on page 10.
Item 11. EXECUTIVE COMPENSATION
Information presented under the following headings in the
company's definitive proxy statement for the Annual Meeting of
Stockholders on May 13, 1997, is incorporated herein by
reference:
Executive Compensation
Options/SARs Grants in Last Fiscal Year
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
Long-Term Incentive Plan Awards in Last Fiscal Year
Pension Plan Table
Compensation Committee Interlocks and Insider Participation
Compensation of Directors
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information presented under the headings "Voting Securities and
Principal Holders," "Nominees for Election as Directors,"
"Security Ownership of Certain Beneficial Owners," and "Security
Ownership of Directors and Executive Officers" in the company's
definitive proxy statement for the Annual Meeting of Stockholders
on May 13, 1997, is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information presented under the heading "Relationships with
Phillips Petroleum Company" in the company's definitive proxy
statement for the Annual Meeting of Stockholders on May 13, 1997,
is incorporated herein by reference.
- ---------------------
*Except for information or data specifically incorporated herein
by reference under Items 10-13, other information and data
appearing in the company's definitive proxy statement for the
Annual Meeting of Stockholders on May 13, 1997, are not deemed
to be a part of this Annual Report on Form 10-K or deemed to be
filed with the Commission as a part of this report.
45
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1. Financial Statements and Financial Statement Schedules
------------------------------------------------------
The financial statements and schedule listed in the
Index to Financial Statements and Financial Statement
Schedules, which appears on page 23, are filed as part
of this annual report.
2. Exhibits
--------
The exhibits listed in the Index to Exhibits, which
appears on pages 48 through 50, are filed as a part of
this annual report.
(b) Reports on Form 8-K
-------------------
During the three months ended December 31, 1996, the
registrant has not filed any reports on Form 8-K.
46
<PAGE>
PHILLIPS GAS COMPANY
SCHEDULE II--VALUATION ACCOUNTS AND RESERVES
Thousands of Dollars
----------------------------------------------
Balance at Balance at
Description January 1 Additions Deductions December 31
- ------------------------------------------------------------------------------
(a) (b)
1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 962 - 57 905
- ------------------------------------------------------------------------------
1995
Deducted from asset accounts:
Allowance for doubtful accounts $1,169 - 207 962
- ------------------------------------------------------------------------------
1994
Deducted from asset accounts:
Allowance for doubtful accounts $2,030 - 861 1,169
- ------------------------------------------------------------------------------
(a) Accounts charged to income less reversal of amounts previously charged to
income.
(b) Accounts charged off less recoveries of accounts previously charged off.
47
<PAGE>
PHILLIPS GAS COMPANY
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3(i) Amended and Restated Certificate of Incorporation of
Phillips Gas Company as filed on October 20, 1992, with
the Secretary of State of Delaware (incorporated by
reference to Exhibit 3.5 to Phillips Gas Company's
Registration Statement on Form S-1, File No. 33-58842).
(ii) Bylaws of Phillips Gas Company as adopted by the
Board of Directors of Phillips Gas Company as of
October 16, 1992 (incorporated by reference to Exhibit
3.6 to Phillips Gas Company's Registration Statement on
Form S-1, File No. 33-58842).
4(a) Certificate of Designations of Series A Preferred Stock
of Phillips Gas Company (incorporated by reference to
Exhibit 4.1 to Phillips Gas Company's Registration
Statement on Form S-1, File No. 33-58842).
10(a) Tax Sharing and Indemnity Agreement dated as of
February 12, 1992, by and between Phillips Gas Company
and Phillips Petroleum Company (incorporated by
reference to Exhibit 10.2 to Phillips Gas Company's
Registration Statement on Form S-1, File No. 33-58842).
(b) Natural Gas Liquids Output Purchase and Sale Agreement
effective as of January 1, 1992, by and between Phillips
66 Company, a division of Phillips Petroleum Company,
and Phillips Gas Company (incorporated by reference to
Exhibit 10.3 to Phillips Gas Company's Registration
Statement on Form S-1, File No. 33-58842).
(c) Sulfur Sales Agreement dated as of January 1, 1992, by
and between Phillips 66 Company, a division of Phillips
Petroleum Company, and Phillips Gas Company
(incorporated by reference to Exhibit 10.4 to Phillips
Gas Company's Registration Statement on Form S-1,
File No. 33-58842).
(d) Gas Sales Agreement dated as of September 8, 1993,
by and between GPM Gas Corporation and Phillips 66
Company, a division of Phillips Petroleum Company
(incorporated by reference to Exhibit 10(d) to Phillips
Gas Company's Annual Report on Form 10-K for the year
ended December 31, 1993).
48
<PAGE>
PHILLIPS GAS COMPANY
INDEX TO EXHIBITS
(Continued)
Exhibit
Number Description
- ------- -----------
10(e) License Agreement dated as of February 1, 1992, by and
between Phillips Gas Company, Phillips Gas Holding, Inc.
and Phillips Petroleum Company (incorporated by
reference to Exhibit 10.10 to Phillips Gas Company's
Registration Statement on Form S-1, File No. 33-58842).
(f) Trademark Agreement dated as of March 30, 1992, by and
between Phillips Gas Company and Phillips Petroleum
Company (incorporated by reference to Exhibit 10.13 to
Phillips Gas Company's Registration Statement on
Form S-1, File No. 33-58842).
(g) Promissory Note dated November 1, 1992, in the initial
principal amount of $475 million, in favor of Phillips
Gas Company executed by GPM Gas Corporation
(incorporated by reference to Exhibit 10.15 to Phillips
Gas Company's Registration Statement on Form S-1, File
No. 33-58842).
(h) Operation and Management Services Agreement dated as
of November 1, 1992, by and between Phillips Gas Company
and Phillips Petroleum Company (incorporated by
reference to Exhibit 10.16 to Phillips Gas Company's
Registration Statement on Form S-1, File No. 33-58842).
(i) Operation and Management Services Agreement dated as of
November 1, 1992, by and between GPM Gas Corporation and
Phillips Petroleum Company (incorporated by reference to
Exhibit 10.17 to Phillips Gas Company's Registration
Statement on Form S-1, File No. 33-58842).
(j) Operation and Management Services Agreement dated as of
November 1, 1992, by and between Phillips Natural Gas
Company and Phillips Petroleum Company (incorporated by
reference to Exhibit 10.18 to Phillips Gas Company's
Registration Statement on Form S-1, File No. 33-58842).
49
<PAGE>
PHILLIPS GAS COMPANY
INDEX TO EXHIBITS
(Continued)
Exhibit
Number Description
- ------- -----------
10(k) Amended and Restated Tax Sharing and Indemnity
Agreement dated as of November 1, 1992, by and between
Phillips Gas Company and Phillips Petroleum Company
(incorporated by reference to Exhibit 10.19 to Phillips
Gas Company's Registration Statement on Form S-1, File
No. 33-58842).
(l) Keep Well Agreement dated as of December 14, 1992, by
and between Phillips Petroleum Company and Phillips Gas
Company (incorporated by reference to Exhibit 10.20 to
Phillips Gas Company's Registration Statement on
Form S-1, File No. 33-58842).
(m) $200 million Credit and Liquidity Agreement dated as of
December 14, 1992, by and between Phillips Gas Company
and Phillips Petroleum Company (incorporated by
reference to Exhibit 10.21 to Phillips Gas Company's
Registration Statement on Form S-1, File No. 33-58842).
21 List of Subsidiaries of Phillips Gas Company.
27 Financial Data Schedule.
Copies of the exhibits listed in this Index to Exhibits are
available upon request for a fee of $3.00 per document. Such
request should be addressed to:
Phillips Gas Company
Corporate Relations
1300 Post Oak Boulevard
Suite 800
Houston, Texas 77056
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ M. J. Panatier
March 7, 1997 -------------------------------------
M. J. Panatier
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on behalf of the registrant
by the following officers in the capacity indicated and by a
majority of directors in response to Instruction D to Form 10-K
on March 7, 1997.
Signature Title
--------- -----
/s/ M. J. Panatier
- ------------------------- President and Chief Executive Officer
M. J. Panatier and Director
(Principal executive officer)
/s/ E. L. Batchelder
- ------------------------- Senior Vice President, Treasurer,
E. L. Batchelder Controller and Chief Financial
Officer and Director (Principal
financial and accounting officer)
/s/ J. J. Mulva
- ------------------------- Chairman of the Board of Directors
J. J. Mulva
/s/ C. L. Bowerman
- ------------------------ Vice President and Director
C. L. Bowerman
/s/ J. L. Adams
- ------------------------- Director
J. L. Adams
/s/ George B. Beitzel
- ------------------------- Director
George B. Beitzel
/s/ O. B. Denny, Jr.
- ------------------------- Director
O. B. Denny, Jr.
51
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES OF PHILLIPS GAS COMPANY
Listed below are the subsidiaries of the registrant at December 31, 1996.
State or Jurisdiction
in Which Subsidiary
was Incorporated
Name of Company or Organized
--------------- ---------------------
GPM Gas Corporation Delaware
GPM Gas Trading Company Delaware
Phillips Natural Gas Company Delaware
GPM Panhandle Gathering Company Delaware
GPM Anadarko Gathering Company Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Phillips Gas Company as of December 31, 1996,
and the related consolidated statement of operations for the year ended
December 31, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 79,031
<SECURITIES> 0
<RECEIVABLES> 245,156
<ALLOWANCES> 905
<INVENTORY> 6,418
<CURRENT-ASSETS> 336,367
<PP&E> 1,972,524
<DEPRECIATION> 1,070,031
<TOTAL-ASSETS> 1,293,076
<CURRENT-LIABILITIES> 339,152
<BONDS> 310,000
0
345,000
<COMMON> 142,917
<OTHER-SE> 131,233
<TOTAL-LIABILITY-AND-EQUITY> 1,293,076
<SALES> 1,648,403
<TOTAL-REVENUES> 1,723,639
<CGS> 1,477,131<F1>
<TOTAL-COSTS> 1,477,131
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,356
<INCOME-PRETAX> 207,864
<INCOME-TAX> 79,665
<INCOME-CONTINUING> 128,199
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,199
<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>